Moon H. Song

The Impact of Managerial Ownership on Acquisition Attempts and Target Shareholder Wealth

This paper examines the relation between managerial ownership and the probability of being a target firm, and the impact of managerial ownership on target shareholder returns. The paper finds that targets have lower managerial ownership than either their industry counterparts or randomly selected nontargets. Managerial ownership is significantly lower in contested compared to uncontested offers, and in unsuccessful compared to successful cases. Managerial ownership is significantly related to abnormal returns in contested cases that are ultimately successful. The results are consistent with a positive impact of managerial ownership where it is used to negotiate, but not ultimately block, an acquisition.

Employee Stock Ownership Plans, Firm Performance, and Monitoring by Outside Blockholders

Employee Stock Ownership Plans (ESOPs) tend to entrench incumbent managers and enhance employee incentives, so the effect of an ESOP on the sponsoring firm is important. We examine long-term performance of ESOP firms and find significant improvement in their year-end performance. This finding supports the positive effects of ESOPs on the performance of the firm overall. We hypothesize that the performance of the ESOP depends on the efficiency of the ownership structure of the firm as a monitoring mechanism. Evidence consistent with our hypothesis is found in the average long-term firm performance.

Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets.

Long-term performance of divesting firms and the effect of managerial ownership

We study the long-term performance of firms that divest assets to assess whether gains arise from reducing agency costs. We find that divesting firms underperform control firms before the divestiture and outperform control firms following the divestiture. The poor performance experienced by divesting firms is unrelated to managerial ownership, but the post-divestiture improvement in performance is strongly related to stock ownership by the CEO. The results support the argument that divestitures remove assets that generate negative synergies and that managerial ownership provides strong incentives to improve operations following the divestiture.

Shareholder wealth effects of free trade: U.S. and Mexican stock market response to nafta

Abstract We investigate shareholder wealth effects of congressional passage of the North American Free Trade Agreement in November 1993. Shareholders of U.S. firms experienced insignificant abnormal returns on average when Congress voted to approve the measure, while Mexican firms received positive returns. Returns were significantly negative on average to U.S. firms in sectors that received special attention in the agreement. Shareholders in the agricultural, textile, and apparel sectors gained, while shareholders in the communications, motor vehicles and equipment, and financial services sectors were harmed by the agreement. Regression analysis shows that returns are proportional to Tobins q, labor intensity, and firm size. Results suggest that value-added growth firms and labor intensive firms gain from trade liberalization with Canada and Mexico.

Acquisition activity of large depository institutions in the 1990s:: An empirical analysis of motives

Abstract This study examines the performance and ownership structure characteristics of financial institutions that chose to aggressively expand by acquiring other institutions. The “wealth maximization hypothesis” posits that in an era of deregulation, the most efficient institutions will acquire the less efficient, thereby creating value and benefiting shareholders. Conversely, the “incentive conflict hypothesis” argues that a large number of acquisitions is a symptom of managers pursuing their own self interests. The empirical results are consistent with the wealth-maximization hypothesis for acquirers that have at least one large outside blockholder and when acquisition activity is measured by assets acquired. But, when acquisition activity is measured by the number of acquisitions, our results fail to support the wealth-maximization hypothesis. Together, these results imply that benefits are more likely to be created when the expansion strategy is implemented by making large acquisitions rather than numerous small acquisitions. Jel classification: G21, G28, G34

Optimum Management Contracting, Agency Problem and the Size of the Firm: A Background Analysis

This paper provides some basic ideas toward constructing an alternative framework for settling up the incurrence of agency costs in an enterprise. We first solve for the optimum amount of shirk consumption under the classical and managerial theories of the firm and then extend the analysis to situations where monitoring activities exist.