M&A Incentives and Outcomes: Evidence from the Mutual Fund Industry

This paper tests hypotheses about the incentives of acquirers and targets in the merger market. The …rst hypothesis of this paper is that some …rms pursue acquisitions that do not maximize pro…ts. The second hypothesis is that targets try to avoid being taken over by acquirers that do not maximize pro…ts. I test these hypotheses using data on acquisitions among mutual fund management companies from 1991 through 2004. I estimate a matching model of the merger market for fund management companies jointly with equations representing the outcomes of mergers. I …nd that companies that are prone to misaligned incentives between owners and managers are more acquisitive than others, yet have signi…cantly worse post-merger operating performance. These …ndings support the hypothesis that there are some managerially motivated acquirers who have poor post-merger management skills in this industry. I also …nd that these acquirers, despite their higher willingness to pay for targets, are not any more likely to match with high-quality targets due to targets’incentive to avoid bad organizations. My counterfactual analysis suggests that targets’aversion to bad organizations is a powerful mechanism that deters many ine¢ cient acquisitions. Department of Economics, University of Minnesota, Email: [email protected]. Tim Bresnahan provided much inspiration and encouragement through this project. I thank Liran Einav, Jon Levin, Eric Zitzewitz, and Takeshi Amemiya for their guidance and insightful comments; Paul Riskind for helpful comments and discussions; Jiawei Chen for his help with code; and seminar participants at Stanford University, University of Minnesota, University of Wisconsin, Harvard Business School, and Ross School of Business for helpful comments. I gratefully acknowledge support by Ewha University and the Koret Foundation through a grant to the Stanford Institute for Economic Policy Research. All remaining errors are my own.