Cash Holdings, Corporate Governance and Acquirer Returns

Abstract

The wealth effect of limiting shareholder rights via anti-takeover provisions (ATPs) is a contentious issue. By taking the differential effect hypothesis perspective, our study aims to provide additional evidence about the relation between ATPs and acquisition performance.

We examine the interaction of antitakeover provisions (ATPs) with firm characteristics and governance environment in explaining the cross-section of bidder announcement returns. Using a sample of 3,340 completed acquisitions by 1,217 firms during 1996-2006, we test the association between ATPs, firm characteristics, and governance environments with bidder returns.

We find that ATPs hurt acquisition performance only when acquirers hold a high level of excess cash. Similarly, ATPs are associated with lower bidder returns only when industry competition is weak and public pension fund ownership is low as well. By contrast, when industry competition is intense and/or public pension fund ownership is high, ATPs do not hurt bidder returns.

The complementarity among ATPs, excess cash, industry competition, and public pension fund ownership suggests that ATPs per se do not necessarily result in value-destroying acquisitions for all firms. We address the endogeneity issue of unknown variables by using a proxy for firm prestige and draw the same conclusions.

Keywords: Cash holdings, Corporate governance, Anti-takeover provisions, Mergers and acquisitions

JEL Classification: G30, G32, G34