Board Connections and M&A Transactions

Abstract:     
This paper examines M&A transactions between firms with current board connections and shows that such transactions generate better merger performance. We find that acquirers obtain significantly higher announcement returns in transactions between connected firms. This result is striking considering such deals involve larger acquirers, public targets, and are more likely to be diversifying acquisitions, three factors shown by earlier research to affect acquirer returns negatively. We also find that acquirers pay significantly lower takeover premiums in connected transactions, consistent with the view that board connections help acquirers avoid overpaying for target firms. In addition, financial advisory fees paid to investment banks are lower in connected acquisitions. Board connections are also positively related to the operating performance of the new firm and negatively related to the probability of forced CEO turnover, suggesting that connected transactions generate better performance in the long run. Finally, we present evidence that the existence of a board connection between two firms has a positive impact on the probability of a subsequent M&A transaction between them. Overall, our results are consistent with the hypotheses that board connections are related to higher quality M&A transactions and that they reduce the degree of asymmetric information between the acquirer and the target about the other’s value.

Keywords: Board of directors, M&A transactions

JEL Classifications: G30, G34, G39

Working Paper Series