Viceroys or Emperors? An Institution-Based Perspective on Merger and Acquisition Prevalence and Shareholder Value

We study how cross-country variance in institutions that aim to address core agency problems influences consequential strategic decisions of firms around the world. Scholars frequently argue that the interests of minority shareholders are threatened by merger and acquisitions (M&As) due to principal-agency problems. Rather than acting in shareholders’ best interests, managers potentially act as viceroys, using M&As to cushion themselves from risk and extract more pay. Yet equally salient is the issue of principal-principal agency, where controlling shareholders can behave as emperors who use M&As to siphon off assets and profits, and appropriate wealth of shareholders with fewer control rights. Taking an institution-based perspective on these ‘viceroy’ and ‘emperor’ problems, we conjecture that institutions aimed to address these agency problems can generate the desired outcome regarding M&A prevalence, but may also produce unintentional negative consequences for shareholder value as a side-effect. Empirical evidence covering M&As from 73 countries supports our hypotheses.