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transactions by emerging market acquirers. Some of the factors researchers argue to be motivating M&As by acquirers from the emerging markets include to seek natural resources, institutional reforms, stronger institutions, due to their latecomer-disadvantages, to seek synergy, to fill capability gap, for diversification and international expansion, to escape from home competition, among others. A potential driver of acquisitions which appears ignored in several of the reviewed studies is managerial ownership in firms, although according to Trautwein (1990) and Goel and Thakor (2005), it is suggested as one of the drivers that encouraged some acquirers firms from developed countries to execute M&A deals but whether it influences acquirers from the emerging markets too to undertake acquisition deals is yet to be established.
Therefore, in this study, we explore managerial ownership and M&A transactions by acquirers from the emerging market through the conceptual framework below and formulate research hypotheses and test them to better explain the relationship between the variables that the study intends to investigate as shown in Figure 5.1 below.
Source: Developed from extant literature.
Figure 5.1: Conceptual Model.
It can be observed from Figure 5.1 above that, managerial ownership (MGROWN) represents the main independent variable of interest while M&As and Firm Sizes are dependent variables. Figure 5.1 also shows other control variables such as Total Assets (TASTS), Returns on Assets (ROAs), Financial leverage (FINLEV), Total debt (DEBTT) that motivate and influence both M&As and Sizes of targets acquirer firms from emerging markets pursue.
Managerial Share Ownership (MGROWN)
A. M&As
B. Firm Sizes
Smaller firms
Larger firms
Control Variables
ROAs
TOBIN`S Q
Financial Leverage
Total Assets
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It can be observed from the conceptual framework that managerial ownership of firms drives M&As as well as the sizes of firms these acquirers pursue in acquisitions. Literature suggests that, managerial holdings of more than 20% may assure managers total control over firms especially on their investment decisions and therefore could influence their decisions to undertake M&As (Faccio & Masulis, 2005). However, whether this assertion is true in the case of acquirer firms from the emerging markets will be investigated through this study.
Managerial ownership in this study is measured as insiders’ shares percentage outstanding.
M&As is same as defined in Section 4.5 of Chapter 4 of this thesis. The firm sizes were classified into smaller and larger firms based on their relative sizes with their respective acquirers. Relative size is measured by the percentage of the acquisition expenses of acquirers to acquirer’s total assets (Park and Jang, 2011). Following the above conceptual framework, the study proposes the following hypotheses as stated in Sections 5.4.1.1 and 5.4.1.2 below.
5.4.1 Justification and Hypotheses of Variables
5.4.1.1 Managerial ownership (MGROWN) and M&A transactions
Managerial ownership was used as our main independent variable for Equations 5.1 and 5.2 of this study, which the study expects to be driving M&As by emerging market acquirers.
Researchers use holdings of management to assess the power managers wield or exercise over investment decision of firms. Morck et al. (1988) for instance refer to management ownership. Song and Walkling (1993) also use the total percentage of shares owned by insiders, directors and officers as a measure of managerial ownership. Himmelberg et al.
(1999) lend support to this definition and consider managerial share ownership to be the share owned by insiders. Kim and Lu (2011) considered the CEOs ownership whereas Chen et al.
(2014) make use of the controlling stakes of shareholders to represent ownership of management. This study, however, supports the views of Song and Walkling (1993) and Himmelberg et al. (1999) and therefore defines managerial ownership as insider share percentage outstanding which refers to the total percentage of equity that is owned by board members and executives of a firm.
It is a well-documented fact in literature that, resource allocation by managers may not be efficient and could adversely affect the value of the investor. Excessive investment and growth are two forms that the empire building theory considers. Empire building, then, stems from differences in preferences between the board of directors (representing investors) and
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executives, in conjunction with the lack of observability, a typical moral hazard problem (Dominguez-Martinez, Swank, & Visser, 2006). Managers usually tend to have control over investment decisions particularly when they wield enough power as a result of the percentage of shares they possess in those firms as literature suggests. They also have a greater say when it comes to the sizes of firms to acquire with company’s resources. In view of the above, the following hypothesis is proposed;
H5.1: Managerial share ownership in acquirer firms is more likely to influence these firms to undertake M&As.
5.4.1.2 Managerial ownership (MGROWN) and Sizes of firms in acquisitions
Managerial ownership can be used to encourage, negotiate or block mergers and acquisitions transactions. Higher managerial ownership is more likely to be a restraining factor to acquisition efforts in bids where there is potential resistance from a firm’s management.
Palebu (1986) and Mikkelson and Partch (1989) suggest that smaller firms are more likely to be targets. Demsetz and Lehn (1985) and Mikkelson and Partch further document of an inverse or indirect relationship between managerial ownership and firm size. Consequently, with respect to the sizes of target firms emerging market acquirers are likely to pursue in acquisitions transactions, this study proposes that;
H5.2: Managerial ownership of emerging market acquirers is more likely to motivate them to pursue smaller target firms in acquisition deals.
5.4.1.3 Control Variables used and M&As Transactions
5.4.1.4 firms’ total debt levels and execution of M&As
The study also included total debt as another control variable. Studies on capital structure suggest that in an imperfect market, the level of debt in a firm’s capital indicates an important way value is created for shareholders (Agyei-Boapeah, 2015). The presence of debt should significantly improve the acquirers post-acquisition performance in line with free cash flow theory by Jensen (1986). Debt attracts interest and limits free cash flow, thus inducing managers to put to use available free cash effectively and efficiently (Harrison et al., 2014;
Sharma & Ho, 2002). Hence, employing externally raised funds leads to a more efficient use of funds and higher profitability than internal funding (Kumar, 1985). This study defines debt
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ratio as total debts over total assets. Total debt can also be measured as the value of total debt as a proportion of total net assets for each year end, where total debt includes short-term and long-term debts. Research on M&A suggests that firms that have unused debt capacity usually decide to undertake M&As on regular intervals compared to their counterparts whose debt levels are high.
5.4.1.5 Other control variables used in this study
Explanations regarding the relationships that exist between the acquirer firms’ ROAs, Tobin’s q, total assets, financial leverage and M&As are the same as previously discussed in Section 4.5.1 of this thesis.