Post-Acquisition Changes in Agency Cost of Acquirers: Effect of Target Companies

Abstract

Acquisitions constitute substantial corporate investments, often leading to changes in ownership and top management giving rise to possible conflicts of interest. The impacts of such conflicts following an acquisition are absorbed by the acquirer and are referred to as agency costs. This study focuses on exploring the influence of the target companies on changes in the post-acquisition agency costs of acquiring companies. A panel fixed effects model is used to analyze acquisitions that took place between 2008–09 and 2019–20. The study’s findings indicate that post-acquisition changes in the agency costs of acquirers significantly vary based on the presence of domestic and foreign promoters in the target company. Further promoter groups such as domestic promoters and foreign promoters contribute to conflicting interests, exacerbating post-acquisition agency costs. The monitoring role assumed by foreign promoters of target companies plays a pivotal part in reducing the post-acquisition agency costs of acquirers. Foreign promoters also positively influence post-acquisition profitability by adversely affecting operating expenses, suggesting that they mitigate agency costs by exerting control over management through the monitoring of debt, cash, and profitability. The post-acquisition utilization of the target’s cash reserves positively correlates with the operating expenses of the acquirer. It is observed that the acquisition of larger targets magnifies agency costs.