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Introduction
Since the 2008 world financial crisis, mergers and acquisitions (M&A) activities have faced growing risks. Evidence points to this as being partially tied to increasingly cross-national M&A activities that intrinsically present higher risks (Denison et al. , 2011; Grave et al. , 2012). In addition, companies in maturing industries are rebalancing their assets through sell-offs of complex activities which are difficult to unpack by acquirers. Indeed, numerous acquisitions of troubled firms have taken place to offer purely an exit path to many stakeholders (Graham et al. , 2013). Acquisition priorities are increasingly targeting revenue growth rather than cost reduction, which in difficult economic times presents significant hurdles (Goranova et al. , 2010). Traditional explanations for M&A activity emphasise value creation for shareholders (Bertrand and Mullainathan, 2003; Bhagat et al. , 1990; Chang, 1990; Comment and Schwert, 1995; Gaughan, 2002; Grossman and Hart, 1980; Haleblian et al ., 2009; Hellwig, 2000; Holmstrom and Kaplan, 2001; Pagano and Volpin, 2005). However, it is clear that M&A activities may not prove beneficial to shareholders if certain unmanageable risks eventuate (Guay, 1999; Hitt et al. , 2009). The risk of M&A failure stems from a variety of causes, including "poor synergy, bad timing, incompatible cultures, off-strategy decision-making, hubris, and greed" (Perry and Herd, 2004, p. 12). In many cases, pure managerial self-interest causes value destruction rather than the value creation according to the objectives laid out by the same management to justify their acquisition strategies (Graham et al. , 2013; King et al. , 2004; Moeller et al. , 2005). Weak risk management and poor compliance procedures that implicitly allow such behaviour to proliferate thus continue to be seen as contributing to M&A failures. This has led to the prioritisation of risk management efforts across a range of corporate, market and institutional contexts (Bruner, 2004; Hitt et al. , 2009; Holmstrom and Kaplan, 2001).
In this paper, we focus on the risks arising from self-interested manager's behaviours within M&A activity, considered a leading driver of M&A failure (Cartwright and Schoenberg, 2006; Rottig et al. , 2013). We model the effects of risk management practices on underlying managerial behaviour and M&A activity. We focus on risk management practices relating to managerial contract renewal possibilities with specific reference to...