Corporate Governance and Acquirer Returns

Abstract:     
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.

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

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

Accepted Paper Series