The Impact of Corporate Governance and Excess Cash Reserves on Acquisition Performance : An empirical analysis of acquirer returns during the last decade in the Nordics
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- Master Thesis 
This thesis researches the effect of agency costs on abnormal stock returns of bidders during the M&A-announcement period. According to agency theory, principal-agency costs may be mitigated if the shareholders (the principal) appropriately monitor the management (the agent) to ensure value-enhancing decision-making. In particular, an influential owner who actively monitors the management should be less likely to spend excess cash reserves poorly, or engage in value destructive investments such as acquisitions. Consequently, we expect bidders with strong owners to (1) perform better in acquisitions, and that (2) cash stockpiles are managed better relative to bidders with dispersed ownership. However, gaining too much control of a firm could cause controlling shareholders to engage in activities and transactions that benefit themselves at the expense of minority shareholders. Thus, principal-principal costs arise as the controlling shareholder seeks ways to benefit themselves at the expense of the minority shareholders. Accordingly, we hypothesize that (3) it is better to have a strong owner than a dispersed ownership concentration, yet too much control is worse than having a strong minority owner without complete control. Through an event study we analyze our hypotheses by a sample of 1.083 acquisitions across the Nordics from 2011 to 2020. Methodically, we design one measure of ownership concentration to test our two first initial hypotheses, and another design to test the third. We find clear evidence of a positive correlation between concentrated ownership and abnormal stock return during the announcement period. Whether we find evidence that bidders with strong owners manage their cash positions better is a question of what we accept in terms of significance. Moreover, our sample gives clear indications of a principal-principal issue. However, agent-principal issues seem to outweigh principal-principal issues. In our sample, bidders with a Controlling majority outperformed bidders with dispersed ownership, but a Large minority owner outperformed them both. Our results give evidence of a non-linear relationship between ownership concentration and bidder performance of firms with excess cash reserves. When the largest shareholder becomes too influential, our data shows that they influence the management negatively compared to firms with a large minority owner. Moreover, we observe indications of an opposite effect with respect to governmental owners.