Does Deal Size Moderate the Effects of Board Faultlines? Evidence from Acquisitions

Meditari Accountancy Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MEDAR-06-2020-0919

The University of Auckland Business School Research Paper Series

Posted: 10 Feb 2022

See all articles by Tidbury Tidbury

Tidbury Tidbury

The University of Auckland

Steven F. Cahan

University of Auckland Business School

Lily Chen

University of Auckland Business School

Date Written: 2021

Abstract

Purpose
Board faultlines, which reflect intrinsic divisions of board members into relatively homogeneous subgroups, are associated with poor firm performance. This paper aims to extend the existing board faultline research by examining how acquisition deal size moderates the negative implications of board faultlines.

Design/methodology/approach
This paper uses a sample of acquisitions and a quantitative research approach to conduct statistical analysis.

Findings
Using a sample of acquisitions announced between 2007 and 2016, this paper finds evidence suggesting that strong faultlines are associated with poorer acquisition outcomes in the long-term, but not in the short term. Further, this paper finds that the effect of faultline strength on long-term acquisition outcomes is weaker for larger acquisition deals than smaller acquisition deals. The findings are consistent with deal size moderating the relation between faultlines and acquisition outcomes.

Research limitations/implications
This paper addresses possible endogeneity through firm fixed effects and instrumental variable analysis. Although this paper provides evidence on the moderating role of deal size in the context of faultlines, future research could examine the role of additional moderators, such as pro-diversity, trust, board leadership and board and task characteristics.

Practical implications
The findings suggest that boards need to be aware of situations where the negative effects of faultlines are more likely to come to the fore. For example, faultlines are more likely to play a role in more routine, obscure monitoring than for high-profile strategic decisions.

Originality/value
The study is multidisciplinary as it draws on the management, organizational behaviour and psychology and finance literature. It contributes to the developing literature on faultlines in several important ways. First, this paper supports their view that faultlines have adverse effects on board performance by showing that faultlines negatively impact discrete strategic investment decisions. Second, this paper provides evidence that deals size moderates the faultline-acquisition performance relation, indicating that the role of faultlines is contextual. Third, this paper finds evidence that suggests investors do not factor in board faultlines when responding to acquisition announcements.

Full paper available at https://doi.org/10.1108/MEDAR-06-2020-0919

Keywords: Governance, Board of directors, Acquisition, Faultlines, Board performance, D70, G34, M41

Suggested Citation

Tidbury, Daniel and Cahan, Steven F. and Chen, Lily, Does Deal Size Moderate the Effects of Board Faultlines? Evidence from Acquisitions (2021). Meditari Accountancy Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MEDAR-06-2020-0919 , The University of Auckland Business School Research Paper Series, Available at SSRN: https://ssrn.com/abstract=4030201

Daniel Tidbury (Contact Author)

The University of Auckland

Sir Owen G Glenn Building, 12 Grafton Road, Auckla
Auckland, 1010

HOME PAGE: http://linkedin.com/in/danieltidbury

Steven F. Cahan

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Lily Chen

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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