Fight the power! principal-principal conflicts in acquisitions of minority equity stakes

While corporations have been increasingly recurring to minority acquisitions for accessing valuable external resources, empirical research shows that acquirers expected performance suffers upon minority acquisition announcements. Since the profitability of these transactions has been linked to acquirer’s ability to influence the target’s decisions, insights from research on ownership issues would suggest that acquirers could obtain more value from minority acquisitions by purchasing larger fractions of the targets’ equity. Yet, comparative corporate governance research remarks that larger minority equity ownership not necessarily leads to greater influence on corporate actions due to institutional-level and firm-level factors. This study explores whether these factors, by affecting the tightness of the relationship between influence and size of minority equity ownership, also moderate the relationship between acquirers’ expected performance and acquisitions of larger minority equity stakes. Through an event study on a sample of 197 minority acquisitions, we observe that acquirers report negative stock market reactions upon minority acquisitions’ announcement. Interestingly, we find that such effect is less negative when they purchase large minority stakes of target firms whose control is contestable. Conversely, we find that acquisitions of larger fractions of equity produce a more negative effect when the target’s controlling shareholder has significant control and when minority shareholder protection is weak.