Benefits of Control, Managerial Ownership, and the Stock Returns of Acquiring Firms

R. Glenn Hubbard, Darius Palia

NBER Working Paper No. 5079 (Also Reprint No. r2039)
Issued in April 1995
NBER Program(s):Corporate Finance

This paper examines the effect of the benefits of corporate control to managers on the relationship between managerial ownership and the stock returns of acquiring firms in corporate control transactions. At low levels of managerial ownership, agency costs of equity (such as perquisite consumption) reduce the returns earned by acquirers. As the managerial stake in the acquiring firm increases, the interests of managers are more closely aligned with those of shareholders, reducing the acquisition premium. At sufficiently high levels of managerial ownership, managers value a reduction in the risk of their nondiversified financial portfolio. However, managers enjoy nonassignable private benefits of control at high levels of ownership which they are not willing to lose by selling their stake in the financial markets. These benefits of control are increasing in the managerial ownership stake and can lead to managers 'overpaying' even when they own a substantial fraction of the firm. Examining mergers that occurred during 1985 to 1991, we find evidence of such a nonmonotonic relationship between the stock returns earned by acquirers and their managerial ownership level. Further, we find that acquiring firms with high levels of managerial ownership tend to diversify more than acquiring firms with low levels of managerial ownership.

download in pdf format
   (330 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5079

Published: Rand Journal of Economics, 26, (Winter 1995), pp. 782-792. citation courtesy of

Users who downloaded this paper also downloaded* these:
Himmelberg, Hubbard, and Palia w7209 Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance
Fahlenbrach and Stulz w13202 Managerial Ownership Dynamics and Firm Value
Shiue and Keller w10778 Markets in China and Europe on the Eve of the Industrial Revolution
Hubbard and Palia w6539 A Re-Examination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View
Moeller, Schlingemann, and Stulz w9523 Do shareholders of acquiring firms gain from acquisitions?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us