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 postM&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 publiclytraded 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 twostage approach: the first stage, predicts the probability of an M&A based on the market valuation variables; the second stage, regresses the postM&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 longterm incentive plans, and in those firms where CEOs are serving on the board of directors. The valuedestroying 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 marketdriven acquisitions could be value destroying when managers engage in opportunistic acquisitions for reasons of selfinterest. Managerial myopia, overconfidence, misaligned incentives, empirebuilding motives and poor corporate governance can all exacerbate the agency problem of marketdriven acquisitions.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)