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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.

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perceptions of agency motives in acquisitions the moderating effects of the external environment
Perceptions of Agency Motives in Acquisitions: The Moderating Effects of the External Environment

Kang, Eugene

Texas A&M University

introduction
Introduction
  • Define agency problem.
  • What are the three main assumptions of agency problems?
    • Opportunistic agents.
    • Conflicting goals.
    • Information asymmetry.
purpose of paper
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
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?
managerial motives for acquisitions
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
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
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
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 conditions9
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 conditions10
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
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.
conclusion
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.