Costs and Benefits of 'Friendly' Boards during Mergers and Acquisitions

Abstract

Finance theory predicts that board independence is not always in the shareholders’ interest. In situations where board advice is more important than monitoring, independence can decrease firm value. I test this prediction by examining the connection between takeover returns and board “friendliness”, using social ties between the CEO and board members as a proxy for less independent boards. I find that social ties are associated with higher bidder announcement returns when the potential value of board advice is high, but with lower returns when monitoring needs are high. The evidence suggests that friendly boards can have both costs and benefits, depending on the company’s specific needs.

Keywords: Governance, Social Networks, Mergers and Acquisitions

JEL Classification: G30, G34, G39