Director Stock Ownership and Acquisition Activity of Firms

Using a Zero-Inflated Poisson (ZIP) model, we examine the effects of nonemployee director ownership and director plan adoption on the firms’ acquisition activity. We hypothesize that the firms’ acquisition activity increases with directors’ ownership as the directors’ incentives become more aligned with those of the shareholders, and they become less risk-averse. But at higher levels of ownership, the directors become more concerned with preserving their wealth invested in the firm, and hence, the firms’ acquisition activity will decrease. The results support our hypothesis and we find nonemployee directors’ stock ownership levels are related to the firms’ acquisition activity in a nonlinear positive manner. The results show that acquisition rates increase at a decreasing rate with directors’ ownership. Further we find that the presence of director ownership plans, that are designed to implement mandatory stock ownership requirements for non-employee directors, do not directly affect the decision to acquire. Overall, we conclude that stock ownership serves as an incentive for non-employee directors to affect a firm’s investment decisions through mergers and acquisitions. .