Agency problems in stock marketdriven acquisitions

Scott Fung, H. Hoje, ShihChuan Tsai

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)


Purpose The purpose of this paper is to examine the ways in which stock market valuation and managerial incentives jointly affect merger and acquisition (M&A) decisions and postM&A performance, and to provide new evidence on the agency implications where such acquisitions are driven by the stock market. Design/methodology/approach Utilizing all publiclytraded US firms in the NYSE, AMEX and NASDAQ during the period from 1992 to 2005 (excluding financial and utility firms), obtained from COMPUSTAT, CRSP, I/B/E/S, and the M&A database provided by SDC Platinum, this paper adopts a twostage approach: the first stage, predicts the probability of an M&A based on the market valuation variables; the second stage, regresses the postM&A firm performance on the predicted probability of a merger or acquisition from the first stage and other control variables. Findings Market valuation has a significant influence on corporate acquisition decisions, particularly for those firms whose compensation packages include less managerial equity ownership, more executive stock options and no longterm incentive plans, and in those firms where CEOs are serving on the board of directors. The valuedestroying acquisitions made by these types of managers are likely to be financed using the firms' stocks, executed with high premiums and undertaken during periods of high market valuation. Originality/value The main finding suggests that marketdriven acquisitions could be value destroying when managers engage in opportunistic acquisitions for reasons of selfinterest. Managerial myopia, overconfidence, misaligned incentives, empirebuilding motives and poor corporate governance can all exacerbate the agency problem of marketdriven acquisitions.

Original languageEnglish
Pages (from-to)388-430
Number of pages43
JournalReview of Accounting and Finance
Issue number4
Publication statusPublished - 2009 Oct 30
Externally publishedYes


  • Acquisitions and mergers
  • Compensation
  • Market value
  • United States of America

ASJC Scopus subject areas

  • Accounting
  • General Economics,Econometrics and Finance
  • Finance


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