Working Paper: NBER ID: w13274
Authors: Jarrad Harford; Dirk Jenter; Kai Li
Abstract: We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.
Keywords: shareholder conflicts; corporate acquisitions; crossholdings
JEL Codes: G30; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| crossholdings by bidder shareholders (G34) | target selection (C52) |
| crossholdings by bidder shareholders (G34) | deal structure (L14) |
| crossholdings influence managerial decision-making (G34) | target selection (C52) |
| crossholdings influence managerial decision-making (G34) | deal structure (L14) |
| high crossholdings (G32) | lower post-acquisition operating performance (L25) |
| crossholdings (G32) | conflicts of interest (G34) |
| crossholdings (G32) | synergies (L14) |