The Sources of Value Destruction in Acquisitions by Entrenched Managers

By Jarrad Harford, M. Humphery‐Jenner, R. Powell. 2012

455 citations recorded by the source corpus.

Prior work has established that entrenched managers make value-decreasing acquisitions. In this study, we determine how they destroy that value. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, when they do buy private targets or public targets with blockholders, they tend not to use all-equity offers, which has the effect of avoiding the transfer of a valuable blockholder to the bidder. We further test whether entrenched managers simply overpay for good targets or choose targets with lower synergies. We find that while they overpay, they also choose low synergy targets in the first place, as shown by combined announcement returns and post-merger operating performance.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/da0ccd8f14456c1af121e1dbb2e083a8b4ade40d

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Citations in the corpus

Financial Statement Comparability and the Efficiency of Acquisition Decisions (2018, unknown): “…exhibit higher announcement returns, higher synergies, and better post 23 We adopt an alternative approach similar to Healy et al. (1992) and Harford et al. (2012) to measure firms’ operating improvements after mergers and…”
CEO Personal Risk-Taking and Corporate Policies (2016, unknown): “…in M&A activity: leverage, dividend yield, an indicator for net loss ﬁrm-years (LOSS DUMMY), the natural log of total assets, free cash ﬂow, Tobin’s Q , and capital expenditures (Bauguess and Stegemoller (2008), Harford, Humphery-Jenner, and Powell (2012), and Malmendier and Tate (2008)).”
Value creation in the quadruple helix: a micro level conceptual model of principal investigators as value creators (2018, unknown): “The issue of value destruction has been the focus of studies in different fields such as finance (Graham et al., 2006; Harford et al., 2012) and strategic management (Campbell et al., 1995).”
Directors’ and Officers’ Liability Insurance and Acquisition Outcomes (2011, unknown): “…more antitakeover provisions, and hence less discipline from the market for corporate control, experience significantly lower announcement-period abnormal stock returns, while Harford, Humphèry, and Powell (2010) show that firms with entrenched managers tend to acquire targets with low synergies.”
COVID-19 Pandemic and Firm-level Cash Holding—Moderating Effect of Goodwill and Goodwill Impairment (2020, background): “However, high goodwill and goodwill impairment, as a kind of risk warning signals, hold back the increase in cash level (Harford, Humphery-Jenner, and Powell 2012).”
CEO Investment cycles (2016, unknown): “24 Harford et al. (2012), Fracassi and Tate (2012)).”
Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act (2015, unknown): “In particular, acquirer CARs are close to zero (for CAR(-10,10)) or slightly negative (for CAR(-42, 125)), which is consistent with prior literature (see e.g., Harford et al., 2012; Masulis et al., 2007; Moeller et al., 2004).”
COVID-19 and Corporate Performance in the Energy Industry (2020, background): “Second, the literature has found the tendency of executives to use M&A to increase their own remuneration, and most of the goodwill fails to bring value enhancement to the enterprise (Harford et al., 2012).”
Industry contagion in loan spreads (2012, unknown): “…more antitakeover provisions, and hence less discipline from the market for corporate control, experience significantly lower announcement-period abnormal stock returns, while Harford, Humphèry, and Powell (2010) show that firms with entrenched managers tend to acquire targets with low synergies.”
The Effect of Cultural Similarity on Mergers and Acquisitions: Evidence from Corporate Social Responsibility (2018, unknown): “The setup of the regressions in those columns is as in Healy, Palepu, and Ruback (1992), and we run the empirical models separately for the High Similarity and Low Similarity subsamples (similar to Harford, Humphery-Jenner, and Powell, 2012, Table 7).”