The Wealth Effect Of The Acquiring Firm's Shareholders: Based On The Power Equilibrium Perspective

One of the enduring puzzles in corporate finance literature is that the wealth effect of the acquiring firm's shareholders is disappointed. In the frame of the stakeholder theory, and following the"achievement -break- rebuilding"process of the firm's internal power equilibrium, this paper analyses the causes of why the acquiring firm's shareholders'wealth effect is disappointed, and discusses the possible measure to improve it. The core opinion of this paper is"to reduce the M&As'risk by boosting the harmony among stakeholders".The nature of the firm is a nexus for a set of incomplete contracts among individuals, so members of the firm usually need to expect their ex post income based on their understanding of the firm's internal power allocation. Since the members who can't turn back their excessively weak position in power allocation and gain enough ex post income will gradually quit the firm, in equilibrium, a comparatively balanced and mutually accepted power allocation will be achieved, and almost each member's interest will be protected in this power equilibrium. In such situation, reinforcing each other's cooperation and sharing the future cooperation surplus become a reciprocal and rational choice.As an important event, the M&A often brings a shock both to the target firm's and the acquiring firm's existing power equilibrium and routine behavior pattern. And the M&As'history indicates that the process and consequence of the M&A's shock effect are not easy to predict ex ante, in other words, in the post-merger integration period, the future power equilibrium and routine behavior pattern are generally unknown and difficult to foresee. In such an uneven and unpredictable situation, the stakeholders, especially the stakeholders of the target firm, tend to lose confidence in the final outcome of the incomplete contract and their allotted revenue in it, so the stakeholders are not easy to be stimulated by the possible future cooperation surplus and spend initial cost to strengthen cooperation, instead, their rational choice converts into seizing short term benefits, or taking actions to reinforce their own power bases, so as to guarantee the future claim rights. These individually rational behavior will let the internal activities of the firm become more and more opportunistic and shortsighted, and along with the downtrend of internal cooperative degree, both the shareholders'and the stakeholders'wealth are easier to be destroyed. The prevalence of opportunistic and shortsighted activities will also impede the post-merger power equilibrium and routine behavior pattern to emerge, and bring about a long and difficult integration period. That is to say, because of the shock effect that brought by the M&A itself, the potential synergy or other value sources in the M&A can't realize smoothly.To improve the M&A's performance, as the most significant encompassing interest holders, the acquiring firm's shareholders should take the responsibility to guarantee the fair implementation of the contracts, so as to let the long term cooperation return but not the short term predatory earnings sufficiently realize, and then the inter-firm cooperation will be rebuilt. For this sake, the acquiring firm's shareholders need to have enough power to protect each party's interest in the incomplete contract, and meanwhile be constrained enough, in order to prevent them not to misuse their power. Based on the analysis above, and according to the analysis of the power base in the firm, the paper summarizes three rules in reducing the the M&As'risk: (1) the acquiring firm's corporate government status must be good enough, (2) non-human capital should play an important role in the post-merger business mode, (3) the stakeholders should have some ability to organize collective action or be able to threaten to quit the firm. Among these three rules, rule one and rule two ensure that the acquiring firm's shareholders have the required power to carry out post-merger integration, rule three ensures that the stakeholders have the necessary power to restrict the acquiring firm's shareholders. When these three rules satisfy, the M&A will create wealth for the acquiring firm's shareholders. This theoretical proposition is supported in empirical study.