Are Acquisitions of Intangibles Less Subject to Agency Problems?

We find that acquisitions exhibit less evidence of agency problems when the target possesses more intangible assets. Acquisitions of intangibles are associated with higher announcement returns, superior post-acquisition performance, and less free cash flow, mitigating empire-building concerns. They are also associated with increases in measures of volatility, risk, and managerial effort, mitigating risk aversion and quiet-life concerns. Our evidence suggests that managerial rents that lead to value-destroying acquisitions are mainly associated with tangible assets. Among non-agency-based theories of acquisitions, acquisitions of intangibles resemble a “like buys like” narrative, in which firms acquire targets with complementary technology and similar investment opportunities.