The impact of moral hazard in institutional environment on the decision to perform partial acquisition or full acquisition

Abstract

This paper investigates the impact of moral hazard on the corporate strategic decision regarding Mergers and Acquisitions. Whether the decision by the acquirer to make partial or full acquisitions is driven by moral hazard is the main implication of this research paper. Considering several subsamples of mergers and acquisition transactions, in domestic transaction, an increase in private benefits of control does increase the odd of making partial acquisition. Considering the subsample of cross-border acquisitions, private benefits of control still increases the odd of making partial acquisition but the effect is less pronounced. Having control for the profit-maximizing reasons to make full acquisitions, the increase in private benefits of control does not increase the odd of making full acquisition which is implied as wealth-destroying decision. The empirical results align more with the profit-maximizing explanation as the acquirer reacts to the private benefits of control by making partial acquisition instead of making full acquisition.