Benefits of control, managerial ownership, and the stock returns of acquiring firms

This article examines how the benefits to managers of corporate control affect the relationship between managerial ownership and the stock returns of acquiring firms. At low levels of managerial ownership, agency costs of equity (such as perquisite consumption) reduce acquirer returns. At high levels of managerial ownership, managers enjoy nonassignable private benefits of control that they would lose if they sold their ownership stake. These benefits of control are increasing in the managerial ownership stake. Examining mergers between 1985 and 1991, we find evidence of a nonmonotonic relationship between the returns earned by acquirers and their managerial ownership level.