Abstract:
While the traditional agency model assumes managerial risk aversion and underinvestment
in high-risk opportunities, the behavioural agency model allows for risk
seeking by managers leading possibly to over-risky investments. Corporate governance
mechanisms through their disciplining roles can steer managers towards optimal risk
and avoid value destruction from either risk-deficit or risk-excess on the part of their
managers. None of the existing studies offer a complete picture of managerial risk
taking by allowing for both managerial risk aversion and risk seeking. The painting of
just such a picture is the primary focus of this thesis. This thesis aims to answer the
following two research questions in the context of corporate acquisitions:
1. What are the factors that drive managers to undertake risky projects?
2. To what extent is firm performance related to the optimal or suboptimal risk level of
an investment project?
This thesis investigates 289 UK domestic high-tech acquisitions and 289
matching low-tech acquisitions over the period 1993-2000. High-tech acquisitions are
argued to be riskier than low-tech acquisitions.
This thesis documents that fixed compensation, annual bonus, and LTIP cash
provide few incentives for managers to conduct risky acquisitions. It finds significant
evidence that equity-based wealth (such as LTIP shares, stock options and managerial
shareholdings) which links managers' wealth to firm stock performance, has a nonlinear
incentive effect on managers' selection of acquisition risk. At a low level, it encourages
managers to pursue risky acquisitions. However, at high levels it discourages
managerial risk taking. This nonlinear effect is mainly contributed to by managerial
shareholdings. No evidence is found that stock options make managers select riskier
acquisitions. Strong evidence is found that a high level of managerial wealth, which
induces managerial risk aversion, can weaken the incentive alignment effect of equitybased
wealth. This thesis finds significant evidence that managerial behavioural biases
(such as overconfidence, over-optimism, and hubris) boosted by good past performance,
firm glamour ratings by the stock market and a flattering media profile induce managers
to engage in risky high-tech acquisitions. Corporate monitors are generally ineffective
in disciplining managers' selection of acquisition risk. Overall, this thesis concludes
that what makes managers take risky acquisitions appears to be the internal factors, i. e.,
factors that work within managers' inner selves and give them more confidence that
they can control risks. External factors such as corporate monitoring devices that try to
control managerial behaviour, do not necessarily boost managers' confidence in their
risk managing capabilities.
Regarding post-acquisition performance, this thesis documents that UK hightech
acquisitions in the 1990s do not bring any value to acquirer shareholders up to
three years after acquisition completion. However, high-risk high-tech acquisitions do
not necessarily destroy more shareholder value than low-risk low-tech acquisitions.
Acquisitions that are identified as at 'optimal' risk level perform better than under-risk
acquisitions. Indeed, more shareholder value is created in acquisitions that are over-risk
than acquisitions that are either optimal-risk or under-risk. Therefore, this thesis
suggests that many UK acquirer managers during the period over 1993-2000 have
foregone valuable but high risk growth opportunities and destroyed shareholder value
more by being excessively risk-averse rather than being adventurous in their risk
choices.