In India, firms have spent around $ 624 billion on merger and acquisitions (M&A) between 2008-2020. In the year 2018 alone, domestic M&A activity was about 4.5% of India’s GDP. Given the size and significance of M&A, it has garnered considerable attention from academia and regulators. M&A’s results in changes to ownership structure and top management which in turn affects agency cost. Therefore, exploring the changes in the agency cost in the context of M & A would be quite relevant in the current context. Agency cost can be defined as a ‘conflict of interest between various stakeholders in the firm’. It is believed that acquisition of a target can possibly have an impact on post-M&A agency cost of the acquirer. There could be three possible scenarios, either agency cost can increase, remain unchanged or decrease post acquisition for the acquirer. Therefore, the first objective is to compare the agency cost of acquiring firm prior to and after M&A. Change in agency cost could be due to its sensitivity to investment in target firm. Hence, the second objective is to examine whether the pre-merger agency cost of target firm explains the difference in the agency cost of the acquirer post-merger. Further, M&As as an event can possibly change board attributes. Hence, third objective is, can the change in board attributes affect post-M&A agency cost of acquirers. Herein, change in agency cost could be the result of changes in board attribute or as a result of the pre-merger agency cost of target entity or both.
Further, impact of changes in agency cost can be mitigated through efficient monitoring (by board) with the obvious one being the monitoring financial disclosures by the firm. In addition, managers of acquirers often face heightened career concerns due to the negative reactions from the market on M&A announcement. This enhances the pressure on the managers to produce positive operating performance in post-merger period thereby affecting disclosure of the acquiring firm. Hence, the fourth objective is structured as, ‘does change in agency cost and board attributes lead to better disclosures post-M&A’.
The findings will help regulators to ensure protection of minority shareholders and retail investors against changes in agency cost due to M&A. Similarly, this study would be helpful for outside shareholders (block holders and institutional shareholders) to evaluate deal from the perspective of pre-merger agency cost of target firm. Examination of changes in board attributes would help regulators to ensure appropriate post-M&A board composition. Further, regulators can formulate policies to ensure better post-M&A disclosure practices.