Sub-Optimal Acquisition Decisions Under a Majority Shareholder System: An Empirical Investigation

Abstract

The high separation of ownership from control achieved in many Italian listed companies through the concurrent use of non-voting shares and stock pyramiding may favour acquisitions made to increase private benefits of the controlling shareholders rather than all the shareholders' wealth. A standard event study methodology is carried out on three different samples of acquisitions during 1989-1996 period in order to test the hypothesis. Firstly, we find evidence that poor performance is more likely to occur in acquiring firms where the separation of ownership from control (as measured by the o/c ratio) is higher. Moreover, value-enhancing transactions are found to be more likely embarked by acquirors smaller in size, with higher prior-performance and higher growth. Secondly, restricting the sample to aquirors with both voting and non-voting shares we show that the average cumulative abnormal returns (CARs) in a 60-day event window is +0.48 percent for the voting versus a significantly lower -4.41 percent for the non-voting shares. We explain this picture as evidence that on one side the average acquisition has been overpaid (as suggested by the negative sign of the non-voting shares). On the other side it reveals that the transaction was expected to lead to higher private benefits to the majority shareholders (as suggested by the revaluation of the vote component as difference between the two classes of shares). Finally, the market reaction to 19 acquisitions where both bidder and seller are held by the same controller clearly shows that the price is set so as to transfer wealth towards the companies located at the upper levels, where the ownership of the majority shareholders is less diluted. We interpret these findings as evidence that through the separation of ownership from control entrenched-majority shareholders owning only a minor fraction of cash flow rights may lead corporate wealth destroying investment decisions. Moreover, we show that the risk of expropriation seems to be the major principal-agent problem in a country characterised by poor legal investor protection, of which Italy may be an ideal archetype