Perceptions of Agency Motives in Acquisitions: The Moderating Effects of the External Environment

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

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

3. 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).

4. Investors’ Reaction • What factors will drive investors’ perceptions of value creation from proposed acquisitions? Investors’ reaction = f (x1, x2, x3, x4 etc..) • Give some examples of x’s in the above function? • How does the quality of corporate governance mechanisms influence investors’ reaction?

5. 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.

6. 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?

7. 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?

8. 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.

9. 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.

10. 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.

11. 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.

12. Findings

13. Findings

14. 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.