NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions

Jarrad Harford, Dirk Jenter, Kai Li

NBER Working Paper No. 13274
Issued in July 2007
NBER Program(s):   CF

We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.

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Document Object Identifier (DOI): 10.3386/w13274

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