Ownership, institutions, and the agency of M&A completion

Abstract

Research Summary: In this paper, we study how variations in debt and equity ownership and the institutions that govern interactions between different types of principals and agents affect the completion likelihood of acquisitions. Using a sample of 55,722 acquisitions, our study finds that risk-averse debtholders reduce the completion likelihood of acquisitions. When acquisitions cross borders, the acquiring capital providers become exposed to institutional environments that have evolved to prioritize different ideologies or principals because of the structure and customers of local capital markets. As a result, institutional duality in home and target countries reduces the completion likelihood of acquisitions. Our study integrates varieties of capitalism arguments and firm-level agency conflicts and highlights the theoretical importance of capital markets and their concentration. Managerial Summary: An acquisition is a highly consequential negotiation process between managers and capital providers of a firm. Based on their evaluation of a potential deal, managers propose acquisitions to capital providers who either accept it or pressure managers into withdrawing from the announced deal. This study considers firms' capital structure and cross-national differences in the governing institutions to explain the resistance of capital providers against announced acquisitions. In particular, it points to the fear of capital providers losing control of their firms as a driver of their resistance against cross-border acquisitions. However, when a favorable capital-market structure in the target's home country alleviates the fears of capital providers, their resistance weakens.