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Institutional cross-ownership, heterogeneous incentives, and negative premium mergers

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  • Erin Oldford

    (Memorial University of Newfoundland)

  • Isaac Otchere

    (Carleton University)

Abstract

Cross-owners, investors who have stakes in both the acquiring and target firms, are likely to focus on the total portfolio wealth effects from mergers and acquisition transactions, rather than the wealth effects of the target or bidder. Cross-owners may be less concerned with value destroying deals because their lack of gains, or even losses, as ownership in the acquiring firm can be offset by benefits derived from their ownership in the target firm. In contrast, shareholders with no cross-ownership, but own shares in either the target or the acquiring firm only, consider the value prospects for the target, thus producing heterogeneous incentives among shareholders to accept an offer. We investigate this heterogeneity within targets of 481 US negative premium deals and find substantial heterogeneity in acquisition incentives within the target firm shareholder base. Target shareholders in negative premium acquisitions experience negative wealth effects, but institutional cross-owners of negative acquisition premium deals realize positive wealth effects. We also find strong evidence of a size effect, where the observed wealth effects are amplified in larger deals. The divergent interests within the target shareholder base, with the attendant heterogeneous incentives to support deals, limits the monitoring capacity of institutional owners in negative premium deals.

Suggested Citation

  • Erin Oldford & Isaac Otchere, 2021. "Institutional cross-ownership, heterogeneous incentives, and negative premium mergers," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 321-351, July.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:1:d:10.1007_s11156-020-00946-1
    DOI: 10.1007/s11156-020-00946-1
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    More about this item

    Keywords

    Mergers and acquisitions; Cross-ownership; Institutional ownership; Ownership structure; Negative premiums;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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

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