Do Bad Boards Allow Bad Acquisitions?

Abstract:     
A large proportion of acquisitions results in shareholder wealth destruction. This study examines who is responsible for allowing bad acquisitions. Using a sample of 349 tax-free, stock-for-stock, pooling acquisitions over 1993-2001, the announcement period abnormal returns of acquirers are found to be negatively associated with weak corporate governance, e.g., staggered boards, infrequent board meetings and a single person serving as both the CEO and chairman. The presence of external stakeholders also influences announcement returns, which are positively associated with larger debt and stock ownership by trust funds. The presence of external monitors continues to be associated with superior performance in the long run, whereas the role of the board appears to diminish. Overall, the results indicate that active boards, stronger governance structures and external monitors are associated with value-enhancing acquisitions. In contrast, weak boards, dominant management and the absence of external monitoring appear to allow bad acquisitions to occur.

Number of Pages in PDF File: 52

Keywords: mergers, acquisitions, takeovers, corporate governance, performance

JEL Classification: G14, G31, G34, L25, M41

working papers series