Journal of Management and Governance

, Volume 8, Issue 4, pp 373–405 | Cite as

Sub-Optimal Acquisition Decisions under a Majority Shareholder System

  • Marco Bigelli
  • Stefano MengoliEmail author


The high separation of ownership from control achieved through the concurrent use of non-voting shares and stock pyramiding could favor acquisitions made to increase private benefits of the controlling shareholders rather than all shareholders’ wealth. A standard event study methodology is carried out on three different samples of Italian acquisitions during the 1989–1996 period in order to test this hypothesis. We find evidence that a worse market reaction characterizes acquiring firms with a higher separation of ownership from control, while more value-enhancing transactions are undertaken by those smaller in size and with higher prior-performance. An entrenchment effect seems to determine a significant U-shaped relationship between the market reaction and the ultimate shareholder ownership. When the sample is restricted to acquiring firms with a dual class equity structure we find that non-voting shares report significantly negative excess returns in contrast to significantly higher positive returns for voting shares. Such evidence seems to indicate that the average acquisition has been overpaid, as suggested by the negative market reaction of the non-voting shares, while it was expected to lead to higher private benefits to the majority shareholders, as suggested by the revaluation of the voting shares. Finally, the market reaction to acquisitions made within pyramidal groups seems to indicate that the price is set so as to transfer wealth towards the companies located at the upper levels, where majority shareholders own greater fractions of the companies’ cash flows.


acquisitions event study non-voting shares pyramidal groups private benefits 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Amihud, Y., Lev, B. 1981“Risk Reduction as a Managerial Motive for Conglomerate Mergers”Bell Journal of Economics12605617Google Scholar
  2. Asquith, P. 1983“Merger bids, Uncertainty, and Stockholder returns”Journal of Financial Economics115183Google Scholar
  3. Bajo, E. M. Bigelli, Sandri, S. 1998“The Stock Market Reaction to Investment Decisions: Evidence from Italy”Journal of Management and Governance2116Google Scholar
  4. Baumol, W.J. 1959Business Behaviour, Value and GrowthMcMillanNew YorkGoogle Scholar
  5. Bebchuk, L.A., Kraakman, R., Triantis, G. 2000“Stock Pyramids, Crossownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights” Morck, R. eds. Concentrated Corporate Ownership 2000, National Bureau of Economic Research Conference VolumeUniversity of Chicago PressChicagoGoogle Scholar
  6. Belsley, D.A.Kuh, E.Welsch, R.E. eds. 1980Regression diagnostics: Identifying influential data and sources of collinearityJohn Wiley & SonsNew YorkGoogle Scholar
  7. Bianchi, M., Bianco, M., Enriques, L. 1998“Pyramidal Groups and the Separation Between Ownership and Control in Italy”Barca, F.Becht, M. eds. The Control of Corporate EuropeOxford University PressOxfordGoogle Scholar
  8. Bigelli M.: 2004 “Dual Class Stock Unifications and Shareholder Expropriation”, SSRN Working Paper.Google Scholar
  9. Brioschi, F., Buzzacchi, L., Colombo , G. 1989“Risk, Capital Financing and the Separation of Ownership and Control in Business Groups”Journal of Banking and Finance13747772Google Scholar
  10. Bradley, M., Desai, A., Kim, E.H. 1988“Synergistic Gains from Corporate Acquisitions and Their Division Between the Stockholders of Target and Acquiring Firm”Journal of Financial Economics21340Google Scholar
  11. Brown, W.O. and M.T. Maloney: 2000, “Exit, Voice, and the Role of Corporate Directors: Evidence from Acquisition Performance”, Working Paper, mimeoGoogle Scholar
  12. Byrd, J., Hickman, K. 1992“Do outside Directors Monitors Managers? Evidence from Tender Offer Bids”Journal of Financial Economics32195221Google Scholar
  13. Buysschaert, A., Deloof, M., Jegers, M. 2004“Equity Sales in Belgian Corporate Groups: Expropriation of Minority Shareholders? A Clinical Study”Journal of Corporate Finance1081103Google Scholar
  14. Campa, J.M., Hernando, I. 2004“Shareholder Value Creation on European M&A”European Financial Management104781Google Scholar
  15. Caprio, L., Bertotto, E. 1995Mercato Azionario e Processo di Crescita Esterna Delle Imprese Italianein Acquisizioni, Fusioni e Concorrenza25177Google Scholar
  16. Cheung Y., P.R. Rau and A. Stouraitis: 2004, “Tunneling, Propping and Expropriation – Evidence from Connected Party Transactions in Honk Kong” –, SSRN Working Paper, forthcoming on Journal of Financial Economics.Google Scholar
  17. Claessens, S., S. Djankov, J. Fan and L.H.P. Lang: 1999, “Expropriation of Minority Shareholders in East Asia”, World Bank Working Paper, 2088. Google Scholar
  18. Dick, A., Zingales, L. 2004“Private Benefits of Control: An International Comparison”Journal of Finance59537600Google Scholar
  19. Dodd, P. 1980“Merger Proposal, Management Discretion, and Stockholder Wealth”Journal of Financial Economics8105138Google Scholar
  20. Dodd, P., Ruback, R. 1977“Tender Offers and Stockholder Returns: An Empirical Analysis”Journal of Financial Economics5105138Google Scholar
  21. Faccio, M., Lang, L.H.P 2002“The Ultimate Ownership of Western European Corporations”Journal of Financial Economics65365395Google Scholar
  22. Faccio, M. and D. Stolin: 2004, “Expropriation vs. Proportional Sharing in Corporate Acquisitions”, Working paper, Vanderbilt University.Google Scholar
  23. Faccio, M., J.J. McConnel and D. Stolin: 2004, “When do Bidders Gain? The Difference in Returns to Acquirers of Listed and Unlisted Targets”, Working Paper, (Vanderbilt University).Google Scholar
  24. Fama, E., Jensen, M.C. 1983“Separation of Ownership and Control”Journal of Law and Economics26301325Google Scholar
  25. Goergen, M., Renneboog, L. 2004“Shareholder Wealth Effects of European Domestic and Cross-Border Takeover Bids”European Financial Management10945Google Scholar
  26. Harford, J. 1999“Corporate Cash Reserves and Acquisitions”Journal of Finance5419691997Google Scholar
  27. Holderness, C.G., Kroszner, R.S., Sheehan, D.P. 1999“Where the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression”Journal of Finance54435469Google Scholar
  28. Holmen, M., Knopf, J.D. 2004“Minority Shareholders Protections and the Private Benefits of Control for Swedish Mergers”Journal of Financial and Quantitative Analysis39167191Google Scholar
  29. Jarrell, G.A., Brickley, J.A., Netter, J.M. 1988“The Market for Corporate Control: The Empirical Evidence Since 1980”Journal of Economic Perspectives24968Google Scholar
  30. Jensen, M.C. 1986“Agency Costs of Free Cash Flow, Corporate Finance and Takeovers”American Economic Review76323329Google Scholar
  31. Jensen, M.C., Meckling, W. 1976“Theory of the Firm: Managerial Behavior, Agency Cost, and Ownership Structure”Journal of Financial Economics11550Google Scholar
  32. Jensen, M.C., Ruback, R.S. 1983“The Market for Corporate Control: The Scientific Evidence”Journal of Financial Economics11550Google Scholar
  33. La Porta, R., Lopez-de-Silanes, F., Schleifer, A., Vishny, R.W. 1997“Legal Determinants of External Finance”Journal of Finance5211311150Google Scholar
  34. La Porta, R., Lopez-de-Silanes, F., Schleifer, A., Vishny, R.W. 1998“Law and Finance”The Journal of Political Economy10611131155Google Scholar
  35. La Porta, R., Lopez-de-Silanes, F., Schleifer, A. 1999“Corporate Ownership Around the World”Journal of Finance54471518Google Scholar
  36. Lang, L.H.P., Stulz, R.M., Walkling, R.A. 1989“Tobin’s Q and the Gain from Successful Tender Offers”Journal of Financial Economics24137154Google Scholar
  37. Lang, L.H.P., Stulz, R.M., Walkling, R.A. 1991“A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns”Journal of Financial Economics29315335Google Scholar
  38. Lewellen, W., Loderer, C., Rosenfeld, A. 1985“Merger Decisions and Executive Ownership in Acquiring Firms”Journal of Accounting and Economics7209231Google Scholar
  39. Loughran, T., Vijh, A.M. 1997“Do Long-Term Shareholders Benefit from Corporate Acquisitions?”Journal of Finance517651790Google Scholar
  40. Manne,  1964“Some Theoretical Aspects of Share Voting”Columbia Law Review6414171445Google Scholar
  41. McConnell, J.J., Servaes, H. 1990“Additional Evidence on Equity Ownership and Corporate Value”Journal of Financial Economics27595612Google Scholar
  42. Mitchell, M.L., Lehn, K. 1990“Do Bad Bidders Become Good Targets?”Journal of Political Economy98372398Google Scholar
  43. Morck, R., Shleifer, A., Vishny, R.W. 1988“Management Ownership and Market Valuation: An Empirical Analysis”Journal of Financial Economics20293315Google Scholar
  44. Morck, R., Shleifer, A., Vishny, R.W. 1990“Do Managerial Objectives Drive Bad Acquisitions?”Journal of Finance453148Google Scholar
  45. Nenova, T. 2003“The Value of Corporate Votes and Control Benefits: A Cross-Country Analysis”Journal of Financial Economics68325351Google Scholar
  46. Neter, J, Kutner, M.H., Nachtsheim, C.J., Wasserman, W. 1996Applied Linear Statistical ModelsIrwinChicagoGoogle Scholar
  47. Nicodano, G. 1998“Corporate Groups, Dual Class Shares and the Value of Voting Rights”Journal of Banking and Finance2211171137Google Scholar
  48. Opler, T., Pinkowitz, L., Stulz, R., Williamson, R. 1999“The Determinants and Implications of Corporate Holdings of Liquid Assets”Journal of Financial Economics52346Google Scholar
  49. Rau, P.R., Vermaelen, T. 1998“Glamour, Value and the Post-Acquisition Performance of Acquiring Firms”Journal of Financial Economics49223253Google Scholar
  50. Roll, R. 1986“The Hubris Hypothesis of Corporate Takeovers”Journal of Business59197216Google Scholar
  51. Shleifer, A., Vishny, R.W. 1997“A Survey of Corporate Governance”Journal of Finance52737783Google Scholar
  52. White, H. 1980“A Heterosckedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heterosckedasticity”Econometrica48817838Google Scholar
  53. Zingales, L. 1994“The Value of the Voting Right: A Study of Milan Stock Exchange Experience”Review of Financial Studies7125148Google Scholar

Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  1. 1.Department of ManagementUniversity of BolognaBolognaItaly

Personalised recommendations