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Market Misvaluation, Managerial Horizon, and Acquisitions

Authors


  • This paper is part of my doctorial thesis at the University of British Columbia. I thank Kai Li, Hernan Ortiz-Molina, Alan Kraus, and Ralph Winter for their supervision and invaluable comments. I also thank the anonymous referee, Robert Heinkel, Feng Zhang, Marcin Kacperczyk, Xia Chen, Jie Wei, Carmen Stefanescu, and seminar participants at the University of British Columbia, the 2008 Midwest Finance Association Conference, and the 2008 Northern Finance Association Conference for their helpful suggestions. Adlai Fisher, Murray Carlson, Zhongzhi Song, and Alexandra Boonekamp provided helpful comments on an early analysis of this topic. All errors are mine.

Abstract

This paper analyzes the impact of managerial horizon on mergers and acquisitions activity. The main predication is that acquiring firms managed by short-horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and inferior postmerger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO's career concern and compensation scheme, and provide empirical evidence supporting the above prediction. Moreover, I also demonstrate that long-horizon managers are more likely to initiate acquisitions in response to high stock market valuation.

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