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The value of risk-taking in mergers: Role of ownership and country legal institutions

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  • Boubakri, Narjess
  • Cosset, Jean-Claude
  • Mishra, Dev
  • Somé, Hyacinthe Y.

Abstract

We investigate whether high-risk-taking firms choose to acquire low-risk-taking firms by paying higher premiums and how the governance environment – embedded in country legal institutions and ownership structures – affects the perceived valuation effect of such acquisitions. We find evidence of a higher perceived valuation effect from an M&A deal when a higher risk-taking firm acquires lower risk-taking targets, which we call risk-taking transfer. However, benefits from such perceived valuation effects go entirely to the targets. The valuation impact of risk-taking transfer is greater when bidders feature better ownership quality (lower fraction of closely held shares), and the acquirer country strongly protects investors’ rights. The results are stronger for vertical and cross-border M&As and when acquirers secure full control of targets.

Suggested Citation

  • Boubakri, Narjess & Cosset, Jean-Claude & Mishra, Dev & Somé, Hyacinthe Y., 2023. "The value of risk-taking in mergers: Role of ownership and country legal institutions," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 427-444.
    • Handle: RePEc:eee:empfin:v:70:y:2023:i:c:p:427-444
    DOI: 10.1016/j.jempfin.2022.12.015
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    More about this item

    Keywords

    Mergers and acquisitions; Agency theory; Governance; Corporate risk-taking; Ownership structure; Target premium;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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