Protective Governance Choices and the Value of Acquisition Activity

43 Pages Posted: 28 Nov 2007 Last revised: 18 Nov 2011

See all articles by Scott W. Bauguess

Scott W. Bauguess

University of Texas at Austin - Department of Finance

Mike Stegemoller

Baylor University

Date Written: September 1, 2008


Protective governance structure is often viewed as costly to minority shareholders who bear the costs of opportunism by entrenched managers. A less common view is that protective governance structures encourage value-enhancing initiative, allowing risk-averse managers to pursue projects they would otherwise forgo. To assess these views we examine the acquisition decisions of S&P 500 firms between 1994 and 2005 and document two entrenching dimensions of governance: founding family presence and larger boards with more inside directors. We find that family firms destroy value when they acquire, consistent with an agency cost explanation for acquisitions. In contrast, firms with large boards and more insiders are more likely to acquire and to create value when they do acquire. These results are consistent with benefits to managerial initiative when managers are insulated from discipline. Finally, we find no systematic evidence that shareholder right limiting provisions either facilitate managerial entrenchment or lead to wealth losses through acquisition activity.

Keywords: Acquisitions, Governance, Family, Ownership, Shareholder Rights

JEL Classification: G32, G34

Suggested Citation

Bauguess, Scott W. and Stegemoller, Michael A., Protective Governance Choices and the Value of Acquisition Activity (September 1, 2008). Journal of Corporate Finance, Vol. 14, No. 5, 2008, Available at SSRN:

Scott W. Bauguess (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Michael A. Stegemoller

Baylor University ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4145 (Phone)

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