We examine the effects of controlling shareholder stock pledge on corporate acquisition decisions and associated performance. Consistent with our aggravated expropriation hypothesis, we find that pledging firms in China initiate more takeovers, but these acquisitions conducted by pledging firms experience lower announcement returns. We adopt the difference in differences and the instrumental variable approaches to establish causality. Channel tests further reveal that pledging acquirers overpay for the deals and are more likely to be involved in related party transactions. Cross-sectionally, we find that the relations between the share pledge and corporate acquisitiveness and returns are more pronounced for non-SOEs and firms with high-level excess cash. Lastly, we document that pledging acquirers underperform in the long-run in terms of lower ROAs and a greater likelihood of goodwill impairment. Overall, our findings indicate that controlling shareholders increasingly expropriate minority shareholders through self-serving corporate takeovers after the stock pledge.

We examine the effects of controlling shareholder stock pledge on corporate acquisition decisions and associated performance. Consistent with our aggravated expropriation hypothesis, we find that pledging firms in China initiate more takeovers, but these acquisitions conducted by pledging firms experience lower announcement returns. We adopt the difference in differences and the instrumental variable approaches to establish causality. Channel tests further reveal that pledging acquirers overpay for the deals and are more likely to be involved in related party transactions. Cross-sectionally, we find that the relations between the share pledge and corporate acquisitiveness and returns are more pronounced for non-SOEs and firms with high-level excess cash. Lastly, we document that pledging acquirers underperform in the long-run in terms of lower ROAs and a greater likelihood of goodwill impairment. Overall, our findings indicate that controlling shareholders increasingly expropriate minority shareholders through self-serving corporate takeovers after the stock pledge.

Little is known about the underlying sources of gains from takeovers. Using plant-level data from the U.S. Census Bureau, I show that one source of gains is increased productivity of capital and labor in target plants. In particular, acquirers significantly reduce investments, wages, and employment in target plants, though output is unchanged relative to comparable plants. Acquirers also aggressively shut down target plants, especially those that are inefficient. Moreover, these changes help explain the merging firms' announcement returns. The total announcement returns to the combined firm are driven by improvements in target firm's productivity, rather than cutbacks in wages and employment. Also, targets with greater post-takeover productivity improvements receive higher offer premiums from acquirers. These results provide some of the first empirical evidence on the direct relation between productivity, labor, and stock returns in the context of takeovers.

Little is known about the underlying sources of gains from takeovers. Using plant-level data from the U.S. Census Bureau, I show that one source of gains is increased productivity of capital and labor in target plants. In particular, acquirers significantly reduce investments, wages, and employment in target plants, though output is unchanged relative to comparable plants. Acquirers also aggressively shut down target plants, especially those that are inefficient. Moreover, these changes help explain the merging firms' announcement returns. The total announcement returns to the combined firm are driven by improvements in target firm's productivity, rather than cutbacks in wages and employment. Also, targets with greater post-takeover productivity improvements receive higher offer premiums from acquirers. These results provide some of the first empirical evidence on the direct relation between productivity, labor, and stock returns in the context of takeovers.

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. Looking at equity prices from 1990 to 2001, we find that these mechanisms are strong complements. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10 - 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to mimic the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of ‘high’ vulnerability to takeovers. Further, we show that the complementary relation exists for firms with lower industry-adjusted leverage and is stronger for smaller firms. The complementary relation is confirmed using accounting measures of profitability. Using data on acquisitions, firm level Q’s and accounting performance, we explore possible interpretations, providing preliminary evidence for a risk effect as well.

This paper documents the relations between firms' pre-offer market valuations and takeover behavior, and evaluates their consistency with the Q theory and the misvaluation theory of takeovers. We employ two valuation measures: price/book ratios and ratios of price to residual income model value. Market valuations of bidders and targets influence the means of payment chosen, the mode of acquisition, the premia paid, target hostility to the offer, the likelihood of offer success, and bidder and target announcement period stock returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre-1990 period than in the 1990-2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990-2000 period than in the pre-1990 period.

We explore whether compensation policies in bidding firms counter or exacerbate agency conflicts by examining CEO pay and incentives around corporate takeovers. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. In the years following mergers, CEOs of poorly performing firms receive substantial increases in option and stock grants that offset any effect of long-term underperformance on their wealth. As a result, the CEO’s pay and his overall wealth become insensitive to negative stock performance, but his wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs’ compensation to poor performance following the acquisition. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures, and that they receive only minor downside protection. Our results highlight that acquisitions are treated differently from other capital investments by the board in setting CEO compensation and our evidence is consistent with the self-serving management hypothesis in corporate acquisitions.