Managerial Incentives to Diversify and Shareholder Monitoring: Evidence from International Acquisitions

The authors examine how a firm's risk change around an international acquisition is related to the managerial equity interest in the firm. Focusing on the international acquisitions made by bidding firms that have weak monitoring from outside shareholders, those that make an acquisition in an unrelated industry, and those that experience negative stock returns around announcements, the authors find that managers of these firms tend to undertake risk-decreasing international acquisitions with the increase of managerial equity ownership and previously granted stock options. The evidence suggests that managerial incentives to use foreign acquisitions to reduce the risk of their personal wealth are more often utilized in the absence of shareholder monitoring.