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Received 10 March 2000
Final revision received 7 May 2001
Key words: agency theory; corporate acquisition strategies; firm risk taking; acquisition performance
In this study, we examine in an agency-theoretic context the influence of executive equity stakes upon corporate strategy and firm value. We argue that beneficial, risk-increasing corporate strategies may initially be emphasized but non-value-maximizing, risk-reducing strategies may subsequently be emphasized as managers expand their stock ownership. We alternatively contend that stock options may have a consistently positive impact on firm risk taking and acquisition returns. The empirical findings are supportive of our expectations. Copyright (c) 2002 John Wiley &Sons, Ltd.
In the literature, several motives for takeovers have been identified. One is the desire for synergy. That is, similarities or complementarities between the acquiring and target firms are expected to result in the combined value of the enterprises exceeding their worth as separate firms (Barney, 1988; Collis and Montgomery, 1998; Harrison et al., 1991). A second motive involves the expectation that acquirers can extract value because target companies have been managed inefficiently (Fama, 1980; Varaiya, 1987). A third motive is attributed to managerial hubris - - the notion that senior executives, in overestimating their own abilities, acquire companies they believe could be managed more profitably under their control (Gupta, LeCompte, and Misra, 1997; Hayward and Hambrick, 1997; Roll, 1986). A further agency theory motive is the anticipation that firm expansion will positively impact the compensation of top managers (Baker, Jensen, and Murphy, 1988; Tosi and Gomez-Mejia, 1989; Wright, Kroll, and Elenkov, 2002) since there tends to be a direct relation between firm size and executive pay.
In the present study, we focus on ownership incentives and managerial preferences regarding takeovers. We contend that managerial ownership incentives may be expected to have divergent impacts on corporate strategy and firm value. This premise has been recognized in previous studies. For instance, Stulz (1988) has examined the ownership of managers of target companies and has proposed that the relationship between that ownership and the value of target firms may initially be positive and then subsequently become negative with rising insider ownership. Moreover, Shivdasani (1993) empirically shows that the relationship of the ownership structure of target companies with the value of hostile bids is...