Ownership concentration & acquiring firm M&A returns : an empirical analysis of acquirer returns in Norway

2020

This thesis studies the relationship between ownership concentration and

acquiring firm M&A announcement returns. In agency literature, ownership

concentration has been proposed as an effective governance mechanism. The

main benefit of ownership concentration is improved corporate performance due

to monitoring and intervention by large shareholders. However, large

shareholders may impose costs if they act only in their self-interest. The net

effect of ownership concentration is therefore unclear. While there are several

studies that analyse the effect of ownership concentration on operating

performance and valuation, to my knowledge, no previous study has examined

its effect on acquiring firm M&A announcement returns. M&A announcements

present a unique opportunity to examine the effect of ownership concentration as

M&A’s intensify the agency costs between managers and shareholders, and the

valuation effects are easily observable.

Using an event study, I analyse a sample of 373 completed acquisitions by

Norwegian public companies from 1997 through 2016. Different levels of

ownership concentration are taken into consideration as the fraction of shares

owned by the largest shareholder may affect the result. I find evidence of an

insignificant relationship between large minority shareholders (shareholders that

own more than 20% and less than 50% of firm’s share) and acquiring firm

announcement returns, and a significantly negative relationship between

controlling majority shareholders (shareholders that own more than 50% of a

firm’s share) and acquiring firm announcement returns. The results indicate that

extreme ownership concentration due to controlling majority shareholders is

associated with a negative effect on acquiring firm announcement returns. To test

if the negative relationship is related to the type of owner, I compare private

controlling owners (active owners) with the state (passive owner). The results of

this test indicate that there is no difference in announcement returns when the

controlling majority owner is a private owner or the state. Overall, the results

raise the question as to whether there are benefits of ownership concentration and

I conclude that the negative relationship is a result of inadequate monitoring by

self-serving, controlling owners.

Note: The terms “bidder” and “acquirer” are used interchangeably.