Shareholder Value Effects of the Use of Value-Based Performance Measures: Evidence from Acquisitions and Divestments

Abstract

Value-based (VB) management is an approach to align the interests of managers and shareholders and thereby increase shareholder value. Prior studies on the performance and shareholder value effects of VB performance measures, however, yield inconsistent evidence. This can partly be attributed to the problem of studying the impact of VB measures on specific decisions. This paper focuses on mergers and acquisitions (M&As), which represent a managerial decision where the interests of managers and shareholder can diverge, and analyzes the performance effects of users of VB measures compared to non-users. Based on a sample of 235 acquisition and divestment announcements of listed German firms between 2003 and 2012, we provide evidence that the use of VB measures is positively associated with market reactions to acquisition announcements, indicating that the use of VB measures mitigates agency costs and improves managerial decision making. Contrarily, the use of VB measures is not significantly associated with market reactions for divestments. This is in line with our theory that divestments contain fewer conflicts between managers and shareholders.