Modelo de la AGI

There are at least two reasons why managers might overpay for an acquisition. One is the free cash flow theory discussed earlier and the other is advanced by Roll (1986), termed the hubris hypothesis or the ‘winner’s curse’.24 Managerial hubris can be explained as follows.

In a contested bid, some bidders are expected to overestimate the value of the target and others underestimate. It is argued that the winning bidder is likely to suffer hubris, that is likely to have the most optimistic, and possibly least realistic view about their ability to manage the assets being acquired. Therefore it is likely that managers who do suffer from hubris actually pay a premium over and above the intrinsic value gained. If the hubris hypothesis holds, then a negative price reaction is expected on the successful bidding firm’s shares.

Roll presents evidence supporting his hubris hypothesis. He argues that the finding in Asquith (1983) that in the pre-bid period, the bidding firms experience a statistically significant positive return of 14.3%, and an insignificant return on the announcement date, is consistent with the hubris hypothesis. The abnormal

24 _{In Roll’s hubris hypothesis, acquisition refers to takeovers or mergers. As argued later, the}

positive return during the pre-bid period indicates that bidding firms are performing well, and therefore are endowed with cash and hubris.

Roll also cites the evidence of Eger (1983), Dodd (1980), and Malatesta (1983) which shows a negative abnormal return by the bidding firms following the original announcement of a merger/takeover that is ultimately successful. Roll interprets the results as consistent with the hubris hypothesis because a price decline in the total value of the bidding firm is predicted as it becomes more certain that the merger/takeover will succeed.

It is important to stress that while the free cash flow theory requires the existence of divergence of interest between the manager and the shareholders, the hubris hypothesis does not. For instance, Roll states that:

“Several recent papers that have examined nontakeover corporate control devices have concluded that the evidence is consistent with conscious management actions against the best interests of shareholders.25 But the hubris hypothesis does not rely on this result. It is sufficient that managers act, de facto, against shareholder interests by issuing bids founded on mistaken estimates of target firm value. Management intentions may be fully consistent with honourable

25 _{See Bradley and Wakeman (1983), Dann and DeAngelo (1983), and DeAngelo and Rice}

(1983). Linn and McConnell (1983) disagree with the last paper. The possibility that managers do not act in the interest of stockholders has frequently been associated with the takeover phenomenon. For example, in a recent review, Lev (1983, p. 15) concludes by saying, “I think we are justified in doubting…the argument that mergers are done to maximize stockholder wealth.” Foster (1983) seems to share this view or at least the view that bidders make big mistakes. Larcker (1983) presents interesting results that managers in large takeovers are more likely to have short-term, accounting-based compensation contracts. He finds that, the more accounting-based the compensation, the more negative is the market price reaction to a bid.

stewardship of corporate assets, but actions need not always turn out to be right.”

Empirical studies have been conducted to ascertain the validity of the hubris hypothesis. For instance, Morck, Shleifer and Vishny (1990) examine the relationship between prior performance of management and the valuation effect around takeover announcements. Morck et al distinguish good managers from bad managers based on prior 3-year stock returns relative to the industry average, and prior 3-year income growth relative to the industry average. Good managers are those that perform better than the respective industries, and vice versa for bad managers.

Based on a multivariate regression analysis, Morck et al find that the quality of management is positively related to bidders’ returns under both measures. That is firms with better quality management are also better bidders. Therefore, the result does not support Roll’s hubris hypothesis which predicts that bidders of better performing firms experience a negative return on the announcement date because they overestimate the targets’ value under their control.

Lang, Stulz and Walkling (1989) also find evidence against the hubris hypothesis. Lang et al measure the quality of management based on Tobin’s q. When their sample is divided into high q and low q sub-samples, they find that bidders that have high (low) q ratios gain (lose) the most when a tender offer is announced. Since the partition of the sample into high and low q can be identified from information available before the tender offer announcement, this

result does not support the view that negative bidder abnormal returns occur because bidders are overcome by hubris during the bidding. Further since the Lang et al result shows that bidders that lose the most when a tender offer is announced have low q ratios, the evidence is consistent with the view that the equity market discounts the share prices of low q firms in a tender offer because of the bidder’s poor managerial skills.

Bradley, Desai and Kim (1988) provide evidence that synergy is created in takeovers, and reject the alternate hypothesis of wealth distribution in takeovers, since hubris hypothesis posits that the gains to target shareholders represent wealth transfers from acquiring firms’ shareholders and not necessarily synergistic gains.

Finally, the evidence presented in Seyhun (1990) also rejects the hubris hypothesis. Seyhun examines managerial stock trading patterns prior to the takeover announcement, and argues that if managerial hubris is the primary motive for takeovers, then one expects to see managers decrease their stock sales prior to the takeover announcement.26 However the results show that in the sub- sample of large negative abnormal returns, managers are not optimistic about the takeover announcements, as there is generally an increase in stock sales prior to the announcement.

Free cash flow theory posits that overpayment for acquisitions is caused by firms having free cash in excess of the availability of positive NPV projects. On the

other hand, the hubris hypothesis posits that overpayment for an acquisition is a result of manager over optimism about their ability to create synergies.

While both propositions have been tested in the context of tender offers and mergers, there is little, if any, study conducted in the context of physical asset expenditure. It is therefore important to investigate to what extent free cash flow theory dominates the hubris hypothesis in explaining negative returns consequent on physical asset expenditure announcements.

If managers overestimate their ability to create synergistic-value, it is equally likely that such managers overestimate their ability to generate value from acquiring a physical asset, and hence overpaying. In this case, the equity market may react negatively to physical asset expenditure announcements made by well- performing firms.