Do minority shareholders benefit from parent-subsidiary mergers?

Abstract

Purpose

The purpose of this paper is to investigate the operating and stock performance of subsidiaries prior to a parent–subsidiary merger and examine whether minority shareholders benefit from such a merger.

Design/methodology/approach

This paper employs a refined performance-adjusted discretionary accrual model as a measure for earnings management prior to parent–subsidiary mergers.

Findings

This paper finds evidence supporting the notion that subsidiaries’ operating performance is manipulated downward prior to parent–subsidiary mergers, but the incentive to expropriate minority shareholders depends on a parent’s percentage ownership of its subsidiary prior to the merger.

Practical implications

The findings of this paper have practical implications for investors and especially for policy makers to regulate this type of mergers.

Originality/value

This study contributes to the thin literature on parent–subsidiary mergers by providing empirical evidence that parent companies can expropriate their minority shareholders’ wealth in these mergers. This finding is consistent with the minority expropriation hypothesis, which contradicts the findings in prior studies on this unique type of mergers.

Citation

Koerniadi, H. and Tourani-Rad, A. (2021), "Do minority shareholders benefit from parent-subsidiary mergers?", International Journal of Managerial Finance, Vol. 17 No. 1, pp. 166-183. https://doi.org/10.1108/IJMF-06-2018-0173