Costs and Benefits of 'Friendly' Boards during Mergers and Acquisitions

Abstract:     
Although recent regulations call for greater board independence, finance theory predicts that independence is not always in the shareholders' interest. In situations where it is more important for the board to provide advice than to monitor the CEO, more independent directors can decrease firm value because the CEO is not willing to share inside information with independent directors. I test this prediction by examining the connection between takeover returns and board "friendliness" using social ties between the CEO and board members as a proxy for less independent, more "friendly" boards. I find that social ties are associated with higher bidder announcement returns when advisory needs are high but with lower returns when monitoring needs are high. These effects intensify as the proportion of the board socially connected to the CEO increases and are not driven by correlations between social ties and other board characteristics. The evidence suggests that friendly boards can have both costs and benefits depending on the specific needs of the company.

Number of Pages in PDF File: 50

Keywords: Governance, Social Networks, Mergers and Acquisitions

JEL Classification: G30, G34, G39

working papers series