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Protective Governance Choices and the Value of Acquisition Activity


Scott W. Bauguess


US Securities & Exchange Commission

Mike Stegemoller


Baylor University

September 1, 2008

Journal of Corporate Finance, Vol. 14, No. 5, 2008

Abstract:     
Protective governance structure is often viewed as costly to minority shareholders who bear the costs of opportunism by entrenched managers. A less common view is that protective governance structures encourage value-enhancing initiative, allowing risk-averse managers to pursue projects they would otherwise forgo. To assess these views we examine the acquisition decisions of S&P 500 firms between 1994 and 2005 and document two entrenching dimensions of governance: founding family presence and larger boards with more inside directors. We find that family firms destroy value when they acquire, consistent with an agency cost explanation for acquisitions. In contrast, firms with large boards and more insiders are more likely to acquire and to create value when they do acquire. These results are consistent with benefits to managerial initiative when managers are insulated from discipline. Finally, we find no systematic evidence that shareholder right limiting provisions either facilitate managerial entrenchment or lead to wealth losses through acquisition activity.

Number of Pages in PDF File: 43

Keywords: Acquisitions, Governance, Family, Ownership, Shareholder Rights

JEL Classification: G32, G34

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Date posted: November 28, 2007 ; Last revised: November 18, 2011

Suggested Citation

Bauguess, Scott W. and Stegemoller, Mike, Protective Governance Choices and the Value of Acquisition Activity (September 1, 2008). Journal of Corporate Finance, Vol. 14, No. 5, 2008. Available at SSRN: http://ssrn.com/abstract=1028590

Contact Information

Scott W. Bauguess (Contact Author)
US Securities & Exchange Commission ( email )
100 F Street, NE
Washington, DC 20549
United States
(202) 551-6660 (Phone)
Michael A. Stegemoller
Baylor University ( email )
P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4145 (Phone)
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