Corporate Diversification, Manager's Incentive, And Shareholder Wealth

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in; mso-pagination: widow-orphan; tab-stops: -4.5pt .5in 1.0in 1.5in 2.0in 2.5in 3.0in 3.5in 4.0in 4.5in 5.0in 5.5in 6.0in;"><span style="font-family: Batang; font-size: x-small;">This study examines the impact of managers' incentives and corporate diversification on the returns to shareholders of acquiring firms in acquisition activities. Managers' incentives are measured by creating an incentive ratio (IR). The IR is constructed by dividing the market value of the equity holdings of the three managers with the largest equity shareholding within the firm by their annual compensation. We hypothesize that managers with a high IR are more likely to undertake acquisitions that benefit the shareholders of the acquiring firm than are managers with a low IR. We further hypothesize that the acquisition of a firm that is a focused acquisition (i.e., same industry) will produce greater returns to the acquiring firm's shareholders than will diversified acquisitions.<span style="mso-spacerun: yes;">  </span>Results indicate significant positive returns to acquiring firms whose managers have high IRs. While diversified acquisitions produce insignificant negative stock returns, focused acquisitions, on average, generate significant positive stock returns for acquiring firms. Results also suggest that managers with a low IR consistently undertake more diversified acquisitions than focused acquisitions, that the group with the combination of high IRs and focused acquisitions produces the highest returns among four groups, and that the group with the opposite combination produces the lowest returns.</span></p>

Les déterminants de la destruction de valeur à court terme pour l'entreprise acquéreuse

“…(1992). In contrast, this result is inconsistent with the results of walker (2000), Delong (2001), Ueng andwells (2001), Dumontier andPecherot-Petitt (2002), and Martynova and Renneboog (2006). These authors found that the similarity between the activities of corporate bidder and target has a positive impact on the CARs.…”

Executive compensation, risk and performance: evidence from the USA

“…As a solution to the agency problem of “the difficulty in monitoring how agent effort influences uncertain outcomes” (Cheng et al , 2015, p. 24), agency theory advocates properly designing executive compensation packages including strong incentives (e.g. equity ownership) (Prendergast, 2002; Cheng et al , 2015) to enhance an executive’s wealth corresponding to the enhanced corporate performance and/or the values of stocks (Baker et al , 1988), and to steer agents’ behavior in serving the best interests of their shareholders (Jensen and Murphy, 1990; Ueng and Wells, 2001; Garas et al , 2022; Kreilkamp et al , 2022; Nkwadi and Matemane, 2022). In summary, the separation of ownership between owners and controllers of companies has necessitated the delegation of power to executives and creation of motivational compensation package to align and take care of various shareholder’s interest.…”

The Impact of CEOs’ Incentives for Risk-Taking or Risk-Aversion on Corporate Performance: Using CEO Vega and CEO Delta as Incentive Measures

“…A common solution to the agency problem inherent in corporate management has been to create executive compensation packages or equity ownership that enhances a managers' wealth in line with increases in corporate performance and/or a firm's stock value (Baker et al, 1988). Ueng and Wells (2001) suggest that both the manager's equity share holdings and whole compensation package should be properly designed to provide a proper incentive for managers for mitigating agency costs.…”