Do Entrepreneurs Make Predictable Mistakes? Evidence from Corporate Divestitures

We assess the argument that corporate acquisitions are driven mainly by agency considerations. This argument holds that certain kinds of mergers—mergers between firms in unrelated industries, mergers between firms with large differences in price-earnings ratios, and mergers financed with stock swaps, for example—will consistently fail, eventually being reversed in a divestiture. Appealing to Mises’s theory of entrepreneurship, we argue instead that divestitures of previously acquired assets usually result from experimentation and learning, healthy attributes of a market economy. We then describe empirical evidence that the long-term success or failure of corporate acquisitions cannot, in general, be predicted by measures of agency conflicts. We also show that mistaken acquisitions are more likely under certain circumstances, namely during periods of intense, industry-specific regulatory activity. This is consistent with the view, expressed repeatedly in the Austrian literature, that entrepreneurial error is associated with government intervention—in particular, with government ownership of property and interference with the price system.