Board Structure, Mergers and Shareholder Wealth: A Study of the Mutual Fund Industry

43 Pages Posted: 12 Jun 2006

See all articles by Ajay Khorana

Ajay Khorana

Georgia Institute of Technology - Finance Area

Lei Wedge

University of South Florida

Peter Tufano

University of Oxford - Said Business School; National Bureau of Economic Research (NBER); University of Oxford - Said Business School

Abstract

We study mutual fund mergers between 1999 and 2001 to understand the role and effectiveness of fund boards. Some fund mergers - typically across-family fund mergers - benefit target shareholders but are costly to target fund directors. We examine whether certain governance structures relate to whether target boards approve these mergers. Fund mergers of this kind are more likely when funds underperform and when their boards are composed of a larger fraction of independent trustees. This strong interaction effect is consistent with more independent boards exhibiting a lower tolerance of poor performance before initiating across-family mergers. This effect is most pronounced when all of the fund's directors are independent, not at the 75% level of independence required by the SEC. Moreover, while boards approve across-family mergers that lead to substantial reductions in their own compensation, more highly paid target fund boards are less likely to approve these mergers. Other structural board characteristics (in particular, board size and independent chairs) are not strongly related to fund merger likelihoods and board structure is unrelated to post-merger performance.

Keywords: mutual fund, board structure, mergers

Suggested Citation

Khorana, Ajay and Wedge, Lei and Tufano, Peter, Board Structure, Mergers and Shareholder Wealth: A Study of the Mutual Fund Industry. Journal of Financial Economics (JFE), Forthcoming; AFA 2007 Chicago Meetings. Available at SSRN: https://ssrn.com/abstract=621081 or http://dx.doi.org/10.2139/ssrn.621081

Ajay Khorana (Contact Author)

Georgia Institute of Technology - Finance Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5110 (Phone)
404-894-6030 (Fax)

Lei Wedge

University of South Florida ( email )

Tampa, FL 33620-5500
United States

Peter Tufano

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288551 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288551 (Phone)

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