Corporate Takeovers, Firm Performance, and Board Composition

Posted: 24 Aug 1999

See all articles by Omesh Kini

Omesh Kini

Georgia State University

William Kracaw

Pennsylvania State University - Department of Finance

Shehzad L. Mian

Emory University - Department of Finance

Date Written: July 1994

Abstract

This paper examines the relationship between corporate takeovers and the hoard of directors as alternative control mechanisms to discipline top management. Previous research shows that CEO turnover subsequent to corporate takeovers is inversely related to pre-takeover market-related performance. We find this relation is concentrated in targets with insider-dominated boards of directors. Our results support the notion that, as an alternative control device, takeovers serve as a "substitute" for outside directors. Further, we show that the discipline associated with corporate takeovers extends beyond top management to effect restructuring of the entire board. The nature of the discipline depends on the composition of the target board prior to the takeover. Disciplinary takeovers result in two general effects: (1) for inside-dominated targets, the number of inside directorships decreases while the number of outside directorships remains about the same; and (2) for outside-dominated boards, the number of inside directorships increases while the number of outside directorships decreases. As a result, the board is recomposed toward a more even balance between inside and outside directorships

JEL Classification: G34

Suggested Citation

Kini, Omesh and Kracaw, William and Mian, Shehzad L., Corporate Takeovers, Firm Performance, and Board Composition (July 1994). Available at SSRN: https://ssrn.com/abstract=5527

Omesh Kini

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

William Kracaw (Contact Author)

Pennsylvania State University - Department of Finance ( email )

609L BUSINESS ADMIN BL
University Park, PA 16802
United States
814-863 0486 (Phone)

Shehzad L. Mian

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-2755 (Phone)
404-727-6313 (Fax)

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