Corporate Governance and Acquirer Returns

63 Pages Posted: 11 Apr 2005  

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Cong Wang

China Europe International Business School (CEIBS)

Fei Xie

University of Delaware

Abstract

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more anti-takeover provisions experience significantly lower announcement-period stock returns than other acquirers. We also find that acquiring firms operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns. Our results support the hypothesis that managers protected by more anti-takeover provisions face weaker discipline from the market for corporate control and thus, are more likely to indulge in empire-building acquisitions that destroy shareholder value. They provide a partial explanation for why anti-takeover provision indices of Gompers, Ishii and Metrick and others are negatively correlated with shareholder value.

Keywords: Corporate Governance, Anti-takeover Provisions, Takeover Protection, Market for Corporate Control, Acquisitions, Acquisition Profitability, Agency Problems

JEL Classification: G34, G14, D84, D21, D23

Suggested Citation

Masulis, Ronald W. and Wang, Cong and Xie, Fei, Corporate Governance and Acquirer Returns. ECGI-Finance Working Paper No. 116/2006; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=697501 or http://dx.doi.org/10.2139/ssrn.697501

Ronald W. Masulis (Contact Author)

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Cong Wang

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Fei Xie

University of Delaware ( email )

Newark, DE 19711
United States

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