Managerial ownership and risk-reducing acquisitions

Abstract

In this chapter we examine the relation between managerial ownership and the announcement returns of 93 Swedish risk-reducing acquisitions, completed over the 1980–1995 period. The evidence shows that there are not distinct governance characteristics associated with bidders' risk-reducing acquisitions. Our results indicate that firms engage in diversifying acquisitions at the expense of shareholders' wealth when managers have no equity stakes on the bidder This result is consistent with the view that risk-reducing acquisitions are motivated by managers' need to diversify the risk associated with their human capital. This result suggests that risk-reducing acquisitions occur when managers' firm-specific human capital is at risk. Managers elect corporate risk-reducing activities as a means of reducing the risk of their human capital. Risk-reducing acquisitions, however, by firms where managers hold equity stakes increase firm value. This result suggests that managerial owners make risk-reducing acquisitions when they have identified potential corporate gains from risk-reduction. Simultaneous equation estimations provide additional evidence suggesting that managerial ownership affects bidder's shareholder returns, while there is no evidence of reverse causality.

Citation

Douka, J. and Holmen, M. (2000), "Managerial ownership and risk-reducing acquisitions", Advances in Mergers and Acquisitions (Advances in Mergers and Acquisitions, Vol. 1), Emerald Group Publishing Limited, Leeds, pp. 183-203. https://doi.org/10.1016/S1479-361X(00)01008-5