Intelligent investing and governance: The role of financial acquirers

This paper examines the role of financial acquirers in the market for corporate assets. We argue that a combination of analytical / deal-making capabilities, superior access to information and appropriate incentive structures places financial acquirers in an advantageous position in pursuing opportunities arising out of underinvestment in the face of uncertainty and strategic complexity and mismanagement / misgovernance of target firms. We test this argument in a sample of 640 US manufacturing firms from 1981-2006 and find, consistent with our theory, that financial acquirers are more likely to target firms that are poorly understood by the public market, that have lower rates of capital investment in the past, and that are underperforming. The paper thus provides empirical evidence for the role played by financial acquirers in addition to laying out the theoretical arguments underlying this strategy. As such, it is a first step towards achieving an in-depth understanding of this important but under-researched class of buyers.