Managerial wealth, behavioural biases and corporate monitoring : impact on managerial risk taking and value creation in UK high-tech and low-tech acquisitions
While the traditional agency model assumes managerial risk aversion and underinvestmentin high-risk opportunities, the behavioural agency model allows for riskseeking by managers leading possibly to over-risky investments. Corporate governancemechanisms through their disciplining roles can steer managers towards optimal riskand avoid value destruction from either risk-deficit or risk-excess on the part of theirmanagers. None of the existing studies offer a complete picture of managerial risktaking by allowing for both managerial risk aversion and risk seeking. The painting ofjust such a picture is the primary focus of this thesis. This thesis aims to answer thefollowing two research questions in the context of corporate acquisitions:1. What are the factors that drive managers to undertake risky projects?2. To what extent is firm performance related to the optimal or suboptimal risk level ofan investment project?This thesis investigates 289 UK domestic high-tech acquisitions and 289matching low-tech acquisitions over the period 1993-2000. High-tech acquisitions areargued to be riskier than low-tech acquisitions.This thesis documents that fixed compensation, annual bonus, and LTIP cashprovide few incentives for managers to conduct risky acquisitions. It finds significantevidence that equity-based wealth (such as LTIP shares, stock options and managerialshareholdings) which links managers' wealth to firm stock performance, has a nonlinearincentive effect on managers' selection of acquisition risk. At a low level, it encouragesmanagers to pursue risky acquisitions. However, at high levels it discouragesmanagerial risk taking. This nonlinear effect is mainly contributed to by managerialshareholdings. No evidence is found that stock options make managers select riskieracquisitions. Strong evidence is found that a high level of managerial wealth, whichinduces managerial risk aversion, can weaken the incentive alignment effect of equitybasedwealth. This thesis finds significant evidence that managerial behavioural biases(such as overconfidence, over-optimism, and hubris) boosted by good past performance,firm glamour ratings by the stock market and a flattering media profile induce managersto engage in risky high-tech acquisitions. Corporate monitors are generally ineffectivein disciplining managers' selection of acquisition risk. Overall, this thesis concludesthat what makes managers take risky acquisitions appears to be the internal factors, i. e.,factors that work within managers' inner selves and give them more confidence thatthey can control risks. External factors such as corporate monitoring devices that try tocontrol managerial behaviour, do not necessarily boost managers' confidence in theirrisk managing capabilities.Regarding post-acquisition performance, this thesis documents that UK hightechacquisitions in the 1990s do not bring any value to acquirer shareholders up tothree years after acquisition completion. However, high-risk high-tech acquisitions donot necessarily destroy more shareholder value than low-risk low-tech acquisitions.Acquisitions that are identified as at 'optimal' risk level perform better than under-riskacquisitions. Indeed, more shareholder value is created in acquisitions that are over-riskthan acquisitions that are either optimal-risk or under-risk. Therefore, this thesissuggests that many UK acquirer managers during the period over 1993-2000 haveforegone valuable but high risk growth opportunities and destroyed shareholder valuemore by being excessively risk-averse rather than being adventurous in their riskchoices.
Year of publication: |
2005
|
---|---|
Authors: | Gao, Lin |
Other Persons: | Sudarsanam, P. S. (contributor) |
Publisher: |
Cranfield University |
Saved in:
freely available
Saved in favorites
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