The Search for Corporate Control: Some Evidence

Abstract

We empirically study the existence and impact of search frictions and the importance of golden parachute provisions in the market for corporate control. We proxy search frictions with the board's degree of connectedness, and also with measures of market thickness, geographic proximity and business similarity. Using data from 1990 to 2006, we find that firms are more likely to be acquirers (targets) when there are more firms available to buy, search costs are low (high), and a golden parachute is not (is) provided to the firm's manager. These findings are largely consistent with predictions from the recent theoretical literature that models the decision of firms to actively search for potential targets. We alleviate concerns that these results are driven by firm heterogeneity or selection bias, by showing that they are robust to the use of OLS with firm-level fixed effects and instrumental variables using CEO salary and lagged board connectedness, respectively. We find that the provision of golden parachutes increases the average acquirer abnorml return by 2.5% whereas it does not significantly impact target premia. We also exploit data on withdrawn mergers to decompose and quantify the stock price reaction between a synergy effect and an information effect, and find that the synergy effect is positive for both acquirers and targets (9 and 20 % on average, respectively), while the information effect is negative for acquirers (-11 %) and positive for targets (between 7 and 10 %.) This helps explaining why acquiers do not win or slightly lose in acquisitions whereas targets enjoy large gains.

Keywords: Mergers and Acquisitions, Search Models, Golden Parachutes, Abnormal Returns, Synergies, Asymmetric Information

JEL Classification: C78, D82, D83, G34, J33, G14, M52