Tobin's q, agency costs and corporate control
Abstract
Three major questions are addressed in this dissertation: (i) To what extent does the presence of agency costs in firms lead to takeovers and how are abnormal returns in takeovers related to the agency costs of the respective companies. (ii) Do the other financial characteristics of targets and bidders correspond to the predictions of the free cash flow theory. (iii) To what extent are agency costs and free cash flows related. A sample of 704 complete takeovers over the period 1972-1987 is collected to address the above questions. Tobin's q is proposed as a proxy variable for agency costs. The major results are: (i) Takeover targets have lower q ratios than their industry peers and the difference increases prior to the takeover. (ii) Takeover targets have lower q ratios than their bidders, after controlling for industry characteristics. (iii) Target abnormal returns are positively related to the q ratios of their bidders and negatively related to their own q ratios. Target, bidder and total abnormal returns are higher when the acquiring firm has high q ratios than the acquired firm. (iv) Takeover targets have lower debt ratios, lower dividend payout ratios and more free cash flows than the other firms in their industries. They also have lower capital expenditures. (v) The differences between the other financial characteristics of targets and bidders are minor, except for the dividend payout ratio: bidders pay out more of their income as dividends than targets. (vi) There is a strong negative correlation between the q ratios and the free cash flow of bidders, targets and the complete sample. This correlation persists even after industry adjustments are made. Overall, the findings support the presence of agency costs in targets and/or bidders. The results are also consistent with the free cash flow theory. Some takeovers are "good" and value is created (agency costs are present in the target firm), while other takeovers are "poor" and value is destroyed (agency costs are present in the bidding firm). The difference in returns for both cases can be as much as 10%.
Degree
Ph.D.
Advisors
McConnell, Purdue University.
Subject Area
Finance
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