Corporate Governance and Acquisitions: Acquirer Wealth Effects in the Netherlands

Abstract

We examine 865 acquisitions by Dutch industrial firms over the period 1993–2004. Theoretical work based on principal–agent problems predicts that managers of exchange-listed corporations may pursue acquisitions even when these do not add value for the shareholders. Corporate governance structures serve to constrain managers in their acquisition activity. In this chapter we measure the shareholder wealth effects of acquisitions and the factors that determine these wealth effects, including the governance characteristics of corporations. Firms in the Netherlands are interesting from the perspective of corporate governance, because the managerial board has a relatively strong position vis-à-vis shareholders. Several takeover defenses commonly used in the Netherlands not only limit shareholder influence during takeover battles, but also in absence of such fights. On the other hand, ownership is relatively concentrated, which may provide shareholders with the incentives and power to monitor the management. The average abnormal stock return following acquisition announcements is 1.1%, which is a significant positive effect. There is only a significant negative impact of the so-called structured regime, a situation where several shareholder rights are delegated to the supervisory board. This result suggests that governance improves acquisition decisions.

Keywords: The Netherlands, Corporate governance, Event study, Mergers & acquisitions