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Corporate Governance and Acquirer Returns

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)

Cong Wang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Fei Xie

University of Delaware

ECGI-Finance Working Paper No. 116/2006
Journal of Finance, Forthcoming

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more anti-takeover provisions experience significantly lower announcement-period stock returns than other acquirers. We also find that acquiring firms operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns. Our results support the hypothesis that managers protected by more anti-takeover provisions face weaker discipline from the market for corporate control and thus, are more likely to indulge in empire-building acquisitions that destroy shareholder value. They provide a partial explanation for why anti-takeover provision indices of Gompers, Ishii and Metrick and others are negatively correlated with shareholder value.

Number of Pages in PDF File: 63

Keywords: Corporate Governance, Anti-takeover Provisions, Takeover Protection, Market for Corporate Control, Acquisitions, Acquisition Profitability, Agency Problems

JEL Classification: G34, G14, D84, D21, D23

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Date posted: April 11, 2005  

Suggested Citation

Masulis, Ronald W. and Wang, Cong and Xie, Fei, Corporate Governance and Acquirer Returns. ECGI-Finance Working Paper No. 116/2006; Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=697501 or http://dx.doi.org/10.2139/ssrn.697501

Contact Information

Ronald W. Masulis (Contact Author)
University of New South Wales - Australian School of Business ( email )
Sydney, NSW 2052
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
HOME PAGE: http://www.firn.org.au

Cong Wang
The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )
Shatin, N.T.
Hong Kong
(852)26961913 (Phone)
(852)26036586 (Fax)
Fei Xie
University of Delaware ( email )
Newark, DE 19711
United States
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