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Managerial Risk-Taking Incentives and Merger Decisions

  • Chen Lin, Micah S. Officer and Beibei Shen


We provide evidence concerning the effect of managerial risk-taking incentives on merger and acquisition (M&A) decisions and outcomes for different types of mergers: vertical, horizontal, and diversifying. Using chief executive officer (CEO) relative inside leverage to proxy for the incentives of risk-averse managers, we find that CEOs with higher inside leverage are more likely to engage in vertical mergers, and those mergers generate lower announcement returns for shareholders. This effect of CEO relative inside leverage on returns for shareholders in vertical acquisitions is more pronounced when the acquirer has a higher degree of informational opacity, weak governance, and excess cash.


Corresponding author

* Lin,, University of Hong Kong School of Economics and Finance; Officer,, Loyola Marymount University College of Business Administration; and Shen (corresponding author),, Shanghai University of Finance and Economics.


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We thank an anonymous referee, Andrew Ellul, Joseph Fan, Kai Li, Paul Malatesta (the editor), Cong Wang, Yuhai Xuan, and seminar participants at the 2013 Australasian Finance and Banking Conference and the Chinese University of Hong Kong for helpful comments and suggestions. Lin gratefully acknowledges the financial support from the University of Hong Kong and the Research Grants Council (RGC) of Hong Kong (Project No. T31/717/12R). Shen is grateful for the financial support from Shanghai University of Finance and Economics.



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