Executive Compensation, Hubris, Corporate Governance: Impact on Managerial Risk Taking and Value Creation in UK High-tech and Low-tech Acquisitions

While the traditional agency model assumes managerial risk aversion and underinvestment in high tech opportunities, the behavioural agency model allows for risk seeking by managers leading possibly to over-risky investment. Corporate governance mechanisms can correct both underand overrisky investment thereby ensuring value enhancing high tech acquisitions. Our study builds an empirical optimal risk model to identify the drivers of managerial risk taking by comparing UK high-tech and low-tech acquisitions. We then classify actual acquisitions into optimal risk, over-risk and under-risk acquisitions. We test whether under-risk and over-risk acquisitions underperform optimal-risk acquisitions in terms of 3-year post-acquisition shareholder wealth gains. Our main results demonstrate that none of the compensation contracts has any impact on managerial risk preferences in acquisitions while LTIP share award may discourage managers from high-tech acquisitions. Good past performance, stock market glamour status and flattering media profile that enhance managerial hubris make acquirer managers risk-seekers in favour of high-tech acquisitions. Corporate governance structure does not have a material impact on managers’ acquisition risk preferences. High-tech acquisitions as well as low-tech acquisitions destroy shareholder value but there is little difference between them. We find no major performance difference between acquisitions in optimal and suboptimal risk groups. We offer possible reasons for this result.