Abstract
Previous research shows that the acquisition premium decreases with acquiring firm managerial ownership and increases with target firm managerial ownership. To provide new empirical evidence on the incentive alignment and entrenchment impacts of managerial equity ownership, we investigate whether there is a curvilinear association between acquiring (target) firm managerial ownership and premium. Our analyses show that both acquiring and target firm managerial ownership have a non-linear association with the acquisition premium. Acquirer executive ownership is negatively associated with acquisition premium when they own less than 9% equity, but this association is positive after this turning point. These results suggest that an increase in acquiring firm managers’ equity ownership reduces premium payments; but when they achieve a controlling equity stake, then they may be able to pay high premiums, which may benefit them at the expense of other shareholders. This suggests that executive ownership does not directly align, but may also diverge, the interests of agents and principals.