Impact of External Monitoring Mechanism on Deal Amounts in Corporate Mergers and Acquisitions: Evidence from Pakistan

Abstract

The studies regarding the deal amount paid in mergers and acquisitions (M&As) become especially important, as reduction of profits in such deals might be due to large amounts paid in acquisitions. The methodology of this study is novel as it takes into account the external governance mechanism by considering both the institutional ownership and external block-holders along with bidder and targeted firm characteristics on deal prices involved in M&As in case of Pakistan during period of 2005-12. The results of study show the existence of external monitoring in form of institutional ownership in both sectors. The study proves that the aim of acquisitions is to achieve a big size instead of value maximization and the managers who exaggerated their confidence attempt to overemphasize their capability to handle the target company, which leads to high amounts paid to acquire target. The nonfinancial sector proves the absence of agency conflicts, however agency hypothesis is not proved significant in financial sector case. The financial sector result shows that cash financed deals are associated with lower price that depends on presence of asymmetric information about acquiring firm, as management (i.e. managers of firm) possess more information as compared to other stakeholders.