Corporate Governance and Diversification

Asia-Pacific Journal of Financial Studies, 41 (1), 2012, 1-31, February 2012

44 Pages Posted: 25 Dec 2011 Last revised: 19 Nov 2016

See all articles by Kimberly C. Gleason

Kimberly C. Gleason

American University of Sharjah

Inho Kim

University of Cincinnati

Yong H. Kim

University of Cincinnati

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Date Written: December 24, 2011

Abstract

In this paper, we investigate the relation between corporate governance and returns to bidders and targets, using 1,640 observations of completed acquisitions from 1996 to 2003. We find that the cumulative abnormal returns for acquirers are significantly negative upon announcement of acquisitions for the full sample and for the related and diversifying sub-samples. However, we find that diversifying acquisitions, when conducted by firms with a higher percentage of outsiders on the board, improve returns. Furthermore, we separately examine high-tech and non high-tech firms to test the relation between board characteristics and announcement returns in different information asymmetry environments. We also find that diversifying acquirers with independent boards perform better than those with insider dominated boards and the results are especially pronounced for high-tech firms. Taken together, the results suggest that firms with better incentive alignment will be more likely to be perceived by the market as stronger performers in acquisitions. In sum, we find that corporate governance plays an important role in determining wealth creation for our sample of acquiring firms.

Keywords: corporate governance, mergers and acquisitions, diversification discount

JEL Classification: G34, G32

Suggested Citation

Gleason, Kimberly C. and Kim, Inho and Kim, Yong H. and Kim, Young Sang, Corporate Governance and Diversification (December 24, 2011). Asia-Pacific Journal of Financial Studies, 41 (1), 2012, 1-31, February 2012, Available at SSRN: https://ssrn.com/abstract=1976756 or http://dx.doi.org/10.2139/ssrn.1976756

Kimberly C. Gleason

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

Inho Kim

University of Cincinnati ( email )

Cincinnati, OH 45221-0389
United States

Yong H. Kim

University of Cincinnati ( email )

Lindner College of Business
410 Carl H. Lindner Hall, P.O. Box 210195
Cincinnati, OH 45221
United States
513-556-7084 (Phone)
513-556-0979 (Fax)

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

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