Perceptions of Agency Motives in Acquisitions: The Moderating Effects of the External Environment Kang, Eugene Texas A&M University

Introduction  Define agency problem.  What are the three main assumptions of agency problems?  Opportunistic agents.  Conflicting goals.  Information asymmetry.

Purpose of Paper  Examine investors’ perception of agency motives during acquisition announcements.  How are investors’ perceptions measured? Investors’ reaction (buy/sell) to acquisition announcements (i.e., what is the perceived value of the acquisition).

Investors’ Reaction  What factors will drive investors’ perceptions of value creation from proposed acquisitions? Investors’ reaction = f (x 1, x 2, x 3, x 4 etc..)  Give some examples of x’s in the above function?  How does the quality of corporate governance mechanisms influence investors’ reaction?

Managerial Motives for Acquisitions  Agency theory:  firms with less effective monitors have higher agency costs from managerial opportunistic behavior, hence  investors more likely to perceive agency motives for acquisitions, hence  less positive investors’ reaction to acquisition announcements, when compared to firms with more effective monitors.

Monitors of Top Executives  Two main monitors of top executives:  Board of directors.  Institutional investors.  Expected relationship:  Independent boards => Positive investors’ reaction.  High concentration of institutional ownership => Positive investors’ reaction.  What did researchers find?

Reasons for Contradictory Results  Why did researchers find contradictory results?  Maybe agency problems may be less of a concern under certain conditions.  Refer to the three basic assumptions of agency problems.  Absent agency problems, will there be a relationship between investors’ reaction and (a) independent boards, (b) institutional ownership concentration?

Impact of Environment Conditions  Environmental Munificence.  Refers to the extent that an environment can support sustained growth.  Low munificence => greater goal conflicts between investors and top executives (recall the GD article) => agency problems more likely.  Positive relationship between investors’ reaction and effective monitors should be found under low munificence.

Impact of Environment Conditions  Environmental Complexity.  Refers to the number and variety of constituents in the environment which a firm interacts with.  High complexity => greater information asymmetry between investors and top executives => agency problems more likely.  Positive relationship between investors’ reaction and effective monitors should be found under high complexity.

Impact of Environment Conditions  Environmental Dynamism.  Refers to the extent to which volatile changes occur in the environment.  High dynamism => greater information asymmetry between investors and top executives => agency problems more likely.  Positive relationship between investors’ reaction and effective monitors should be found under high dynamism.

Summary  Positive relationship between investors’ reaction and effective monitors should be found under:  Low munificence.  High complexity.  High dynamism.  No (or insignificant) relationship between investors’ reaction and effective monitors should be found under:  High munificence, Low complexity, Low dynamism.

Findings

Conclusion  Resource-scarce, complex, and dynamic environments appear to exacerbate perceived agency problems and hence increase the importance of monitoring mechanisms when assessing the value of an acquisition.  Investors may perceive increased monitoring as being counter-productive when a firm's external environment is resource-abundant, stable, or not complex.  Symbolic information about governance arrangements affects investors’ evaluations of managerial motives for acquisitions.