Structural Investigation of Acquiring Managers' Incentives in Takeovers

Abstract

This paper quantifies the degree of agency conflicts in acquiring firms. By estimating managerial valuations using a structural method and calculating shareholder valuations from stock market reactions to takeovers, I find that acquiring managers overvalue targets by 63% of target capitalization. As a result, acquiring managers pick targets that provide no synergy gains in 17% of takeovers and overbid by 13% of target capitalization in the rest. Private benefits sought by acquiring managers amount to $9 million on average and vary substantially across firms. Agency problems are more severe for larger bidders that have greater free cash flows and chase larger targets. However, an independent board can reduce private benefits and mitigate agency problems for acquiring firms.

Keywords: M&As, Private Benefits, Overvaluation, Overbidding, Structural Estimation

JEL Classification: C11, D44, G30, G34