Does Mandatory Shareholder Voting Prevent Bad Acquisitions? The Case of the United Kingdom

• Author: Marco Becht,Stefano Rossi,Andrea Polo
• Date: 01 March 2019
• Published date: 01 March 2019
• DOI: http://doi.org/10.1111/jacf.12329

IN THIS ISSUE:

Agency

Capitalism

8The Rise of Agency Capitalism and the Role of Shareholder

Activists in Making It Work

Ronald J. Gilson, Columbia and Stanford Law Schools, and

Jeffrey N. Gordon, Columbia Law School

23 e Eect of Shareholder Approval of Equity Issuances

Around the World

Clifford G. Holderness, Boston College

42 Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

e Case of the United Kingdom

Marco Becht, Université libre de Bruxelles, CEPR, and ECGI; Andrea Polo, Luiss University,

Universitat Pompeu Fabra, EIEF, Barcelona GSE, CEPR and ECGI; and Stefano Rossi, Bocconi

University, CEPR, and ECGI

62 e Early Returns to International Hedge Fund Activism: 2000-2010

Marco Becht, Université libre de Bruxelles, CEPR, and ECG; Julian Franks, London Business

School, CEPR, and ECGI; Jeremy Grant, Berenberg Bank; and Hannes Wagner, Bocconi University,

ECGI, and IGIER

81 How Has Takeover Competition Changed Over Time?

Tingting Liu, Iowa State University, and Harold Mulherin, University of Georgia

95 Do Large Blockholders Reduce Risk?

David Newton and Imants Paeglis, Concordia University

113 Estimating the Equity Risk Premium and Expected Equity Rates

of Return: e Case of Canada

Laurence Booth, University of Toronto

126 Save the Buyback, Save Jobs

Greg Milano and Michael Chew, Fortuna Advisors

VOLUME 31

NUMBER 1

WINTER 2019

APPLIED

CORPORATE FINANCE

Journal of

42 Journal of Applied Corporate Finance • Volume 31 Number 1 Winter 2019

T

In the case of corporate acquisitions, there is extensive empiri-

cal evidence that a large percentage of mergers and acquisitions

are linked to negative abnormal returns for acquirer sharehold-

ers, and that the losses from the worst-performing deals are

very large. is raises the question: why do managements and

boards continue to make acquisitions that the market appears

to believe will reduce their long-run value?

ere are two leading explanations that are related to

CEO behavior. e rst centers on the traditional “separa

-

*This article summarizes the ndings of, and draws heavily on our article, “Does

Mandatory Shareholder Voting Prevent Bad Acquisitions?,” Review of Financial Studies,

Volume 29, Issue 11, November 2016. For helpful comments we thank the editor of the

JACF Don Chew, the editor of the RFS David Denis and two anonymous referees, John

Armour, Espen Eckbo, Julian Franks, Xavier Freixas, Jeffrey Gordon, Clifford Holderness,

Gianmarco Leon, Dennis Mueller, Tim Jenkinson, Gregor Matvos (discussant), Colin

Mayer, David Mayhew, Cas Sydorowitz, Karin Thorburn (discussant), Toni Whited, Bur-

cin Yurtoglu, and seminar participants at the American Finance Association Meetings in

Boston, BI, Gerzensee, Pompeu Fabra, Purdue, Temple, WBS, and WHU. We also thank

Sarah Inman, Gaurav Kankanhalli, and Wesley Tan for their able research assistance.

Becht acknowledges nancial support from the Goldschmidt Chair for Corporate Gover-

nance at the Solvay Brussels School for Economics and Management at Université libre

de Bruxelles. Polo acknowledges nancial support from the AXA Research Fund.

1 See Holderness (2015) as well as his article in this issue of the JACF. Full citations

of all articles are provided in the References at the end of the article.

2 Ertimur, Ferri, and Muslu (2011).

3 Macey, O’Hara, and Pompilio (2008).

4 See Andrade, Mitchell, and Stafford (2001), Bouwman, Fuller, and Nain (2009),

Harford, Humphery-Jenner, and Powell (2012), and (Moeller, Schlingemann, and Stulz

(2004, 2005).

tion of ownership and control” problem discussed by Berle

and Means in the 1930s. Managers exercise eective control

over widely held corporations, and their private goals can

conict with those of shareholders, particularly in the case of

large acquisitions. In some cases, managers make ill-advised

diversifying acquisitions or deliberately take excessive risks,

particularly when they have access to cash or the ability to

issue overpriced stock. e main solution to such “agency”

conicts is the market for corporate control—and to a lesser

extent, the media—which can help align the incentives of

managers and shareholders.

e second explanation focuses on managerial overcon-

dence, or “hubris.” Overcondent CEOs have a tendency

to overpay when making acquisitions, an assertion that is

supported by considerable empirical evidence.

Shareholder voting provides a potential solution to both

of these problems. Rational shareholders can veto actions

driven by overcondence, while vigilant shareholders can stop

transactions motivated by private benets. If the deterrence

eect of mandatory shareholder voting is large enough, CEOs

will be far more disciplined when pricing deals and reluc-

tant to propose projects that their shareholders are unlikely

5 See Roll (1986) and Malmendier and Tate (2008).

by Marco Becht, Université libre de Bruxelles, CEPR, and ECGI; Andrea Polo, Luiss University, Universitat Pompeu

Fabra, EIEF, Barcelona GSE, CEPR and ECGI; and Stefano Rossi, Bocconi University, CEPR, and ECGI*

here is a broad consensus among lawmakers and regulators that decisions with

potentially large consequences for shareholders should be vetted through the use of

extraordinary shareholder resolutions—that is, shareholder voting. But there is no

international consensus on exactly which decisions fall into this category. In some countries,

shareholders have a direct say on equity issuance,1 remuneration policies (“say on pay”),2

voluntary delistings,3 and large acquisitions. Nevertheless, in most countries, most of these

decisions are not subjected to shareholder resolutions, but are instead delegated to boards of

directors or supervisory boards.

Does Mandatory Shareholder Voting Prevent Bad

Acquisitions? e Case of the United Kingdom