Liability protection,director compensation,and incentives

We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.     

Friends in the right places: The effect of political connections on corporate merger activity

This study examines how the appointment of former politicians and regulators to boards of directors or management teams influences corporate acquisition activity and performance. We find that bidders with political connections are more likely to acquire targets and avoid regulatory delay or denial. The merger premium paid increases with political connectedness. The announcement period returns show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected bidders make more bids and bid on larger targets. Connected acquirers also enjoy superior post-merger financial and operating performance.     

Does takeover competition affect acquisition choices and bidding firm performance? Australian evidence

We examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short-term announcement window, competition-induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock-financed takeovers undertaken in a competitive takeover market show a long-run decline in performance of acquirers.     

Multiple bids as a consequence of target management resistance: A count data approach

In this article, we focus on the question of target management resistance and the incidence of subsequent bids. A Poisson count data model is used where the dependent variable represents the number of bids (count) received and the independent variables comprise target management actions and firm specific characteristics. Of the target management actions considered, legal defense and the entry of a white knight are associated with additional bids. With respect to firm specific characteristics, we find that a high initial bid premium deters subsequent bids. Firm size is also significant and has an interesting relationship with the number of bids received. Larger target firms tend to receive more bids; however, the number of bids tails off for firms with assets exceedng $12 billion.     

Dual-class premium,corporate governance,and the mandatory bid rule: Evidence from the Brazilian stock market

This paper conducts a systematic analysis of the determinants of the relative price difference between voting and non-voting shares, i.e., the “dual-class premium,” within the context of a mandatory bid rule. While the removal of the mandatory bid rule can increase potential gains from control, it can also weaken protection for minority shareholders. We provide evidence that the latter effect dominates by showing that the premium increases (decreases) in response to enhancement (lowering) of investor protection via regulatory alterations in the rule. The premium is lower in government-owned firms, which may be an indicator that control transfers, that allow benefits from the mandatory bid rule to accrue to minority shareholders, are less likely in government-owned firms. We also find that the premium is inversely related to an index designed to capture the firm's corporate governance practices. The results suggest that expropriations of minority shareholders are more likely at firms with poor corporate governance provisions and weak takeover rules relating to mandatory bids.     

CEO DIRECTORS,EXECUTIVE INCENTIVES,AND CORPORATE STRATEGIC INITIATIVES

I study how directors who are chief executive officers (CEOs) of other firms affect board effectiveness. I find that CEOs are paid more and their compensation is less sensitive to firm performance when other CEOs serve as directors. This is not an employment risk premium because CEO directors are not associated with higher turnover‐performance sensitivity. Also, CEO directors have no effect on corporate innovation but are associated with higher acquisition returns, especially for complex deals. My results suggest that the advisory benefits of CEO directors must be balanced against the distortions in executive incentives associated with their board service.     

Director compensation incentives and acquisition performance

This paper investigates the relation between director compensation structure and shareholder interests in the context of acquisitions. Our evidence suggests that acquirer firms that compensate their directors with a higher proportion of incentive-based compensation have significantly higher stock returns around the announcement. Compared to acquirers in the low equity-based compensation group, acquirers in the high equity-based compensation group outperform by 9.54% in a five-day period surrounding the announcement date. These results hold even after controlling for endogeneity issues. We further find that acquirers with higher equity-based pay exhibit greater improvements in stock price and operating performance in the three years following acquisitions. An increase in director equity-based pay also results in a lower acquisition premium for targets. These results indicate that equity-based compensation provides incentives for directors to make decisions that meet the interests of shareholders.     

Board gender diversity and acquisition choices

We investigate the influence of gender diversity on the acquisition choices of bidding firms and find that firms with greater gender diversity are more likely to acquire nonlisted targets, use cash as the method of payment, and purchase firms in similar industries. Results show that these preferences are significantly influenced by female directors' financial expertise, target industry experience, mergers and acquisitions (M&A) experience, academic and professional qualifications, and networks. The percentage of female directors on boards is positively correlated with the market response to the announcement of acquisition choices preferred by female directors. Furthermore, bidders improve efficiency and accumulate long-term value gains through the contributions made by their female directors to these acquisition choices.     

Inside the board room: the influence of nationality and cultural diversity on cross-border merger and acquisition outcomes

This study is among the first to systematically examine how increasing nationality and cultural diversity on the boards of large U.S. corporations influence their cross-border merger and acquisition (CBMA) decisions. We find that firms with foreign representation on boards more frequently engage in less profitable CBMAs. We also find that the negative role of foreign directors in the strategic decision-making process is due at least in part to the cultural differences between foreign and U.S. directors, especially in transactions with a high degree of uncertainty. Finally, we show that the adverse effect of foreign directors prevails in the post-SOX (Sarbanes–Oxley Act) period and reduces with longer foreign director tenure and more inclusive board culture. Overall, our findings suggest the presence of foreign directors could negatively affect CBMA decision-making effectiveness, consistent with the argument that national cultural diversity hinders communication and collaboration within boards.

     

Shareholder Wealth Effects of European Domestic and Cross‐border Takeover Bids

This paper analyses the short‐term wealth effects of large intra‐European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short‐term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market‐to‐book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.     

Multiple Bids, Management Opposition, and the Market for Corporate Control

We use regression analysis to disentangle the wealth effect for acquired firm shareholders of management opposition and multiple bids (e.g., multiple bidders and bid revisions). Although multiple bidders and bid revisions occur more frequently for opposed acquisitions, opposition is not associated with incremental acquisition returns for acquisitions with multiple bidders. We also find that management opposition has no significant incremental effect on single bidder acquisitions unless the acquiring firm revises its initial bid. These findings indicate that rather than amplifying acqiuisition returns directly, management opposition instead serves as a negotiating tool to solicit additional bids.     

Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.     

Directors' Recommendations on Takeover Bids and the Management of Earnings: Evidence from Australian Takeovers

This article investigates whether Australian companies manage their earnings during takeover bids in a manner consistent with the earnings-management hypothesis. This hypothesis predicts that directors who reject a bid use accrual accounting to increase current earnings, supporting their claim that the bid, relative to earnings, is inadequate. Likewise, directors who accept a bid are predicted to use accrual accounting to decrease current earnings. Overall, the results are not consistent with the earnings-management hypothesis. However, some components of unexpected accruals (our proxy for managed earnings) change in the direction predicted by the earnings-management hypothesis, although these changes are not statistically significant. Using industry adjusted performance measures the conclusion is that unexpected accruals are primarily a manifestation of poor financial performance of target firms in the period leading up to the takeover bid.     

Rational expectations,analysts' forecasts of earnings and sources of value gains for takeover targets

Value gains to target firm shareholders in takeover bids may be due to potential synergy between bidder and target and/or potential target restructuring based on new information released by the bid. Since these two models have different implications for the anticipated earnings of the target as a stand-alone entity, analysts' earnings forecast revisions (AFR) for the target during the bid may provide evidence for the new information hypothesis. For 326 UK targets of takeover bids during 1987–1993, we estimate analysts' earnings forecast revisions using the Institutional Brokers Estimate System (IBES) and relate them to bid premia paid to target shareholders. Analysts revise their forecasts significantly up on bid announcement. For failed, especially failed hostile, bids, the earnings forecast revision and bid premium are more positively correlated than for successful and friendly bids. This is consistent with the rational expectations behaviour of target shareholders modelled by Grossman and Hart [S.J. Grossman, O.D. Hart, Bell Journal of Economics 11(1) (1980) 42; S.J. Grossman, O.D. Hart, Journal of Finance 36 (1981) 253].     

Choice of acquisition form in Australia and the post‐takeover employment of target firm directors on the acquiring firm board

In Australia, a corporate acquisition can be structured as either a scheme of arrangement or a takeover. We investigate the association between deal structure and the retention of target directors on the merged entity board. We find that the odds of a target director subsequently sitting on the merged entity's board are significantly higher in schemes. The results also show that premiums are lower in schemes of arrangement when additional target directors are appointed to the board of the acquiring firm. The findings indicate that target director appointment is unrelated to the merged entity's post‐acquisition performance.     

Social Concentration on Boards,Corporate Information Environment and Cost of Capital

Prior evidence on the relationship between demographic diversity in corporate boards and firm performance is mixed. Some studies have found that the relationship between board attributes and firm performance is driven by a firm's information environment. This study examines whether corporate transparency also impacts the relationship between gender and ethnic diversity of directors and firm performance. To test this hypothesis, I use a Herfindahl Index based on directors’ gender and ethnicity to measure board diversity, and an opacity index based on analyst following, analyst forecast error, bid‐ask spread, and share turnover to measure corporate transparency. I find that the cost of capital is positively associated with social concentration on corporate boards and that this premium is larger for highly opaque firms. In further analysis, I find that the interaction of corporate information environment and social concentration on boards is more important for operationally complex firms. Compared with simple firms, operationally complex firms pay a greater premium on their capital if they have a socially concentrated board and an opaque information environment.     

Corporate governance and ownership structure of target companies and the outcome of takeovers

This paper examines the influence of the corporate governance and ownership attributes of target companies on the outcome of takeovers in Australia between 1991 and 2000. The findings suggest that board composition and chairperson identity of target companies and director, institutional investor and external share ownership in targets have minimal effects on the likelihood of takeover success. The nature of the recommendations of target directors is found to be the most significant determinant of takeover success or failure, and bid premium levels and offer price revisions are also shown to be important in discriminating between successful and failed takeovers. The results bring into question the likely effectiveness of the introduction of formal corporate governance requirements in Australia and advocate a modification to existing corporate legislation to encourage takeover activity.     

Covering or monitoring? Independent director connectedness and corporate fraud in China

This paper examines how independent directors’ social capital, as measured by their social network, affects corporate fraud. We find that firms with well-connected independent directors are less likely to commit fraud, supporting our monitoring effect hypothesis. This result is robust to a battery of tests. Further analyses show that the effect is stronger for firms with a relatively poor legal environment, for firms whose independent directors face strong reputation incentives and when independent directors are audit committee members. Moreover, we explore a potential economic mechanism of the effect and observe that well-connected independent directors are associated with less absenteeism and more dissension. Overall, our findings suggest that independent directors’ social capital plays an important role in corporate governance.     

Director–Liability–Reduction Laws and Conditional Conservatism

We study nonofficer directors’ influence on the accounting conservatism of U.S. public firms. Between 1986 and 2002, all 50 U.S. states enacted laws that limited nonofficer directors’ litigation risk but often left officer directors’ litigation risk unchanged. We find that conditional conservatism decreased after the staggered enactments of the laws, which we attribute to less nonofficer director monitoring of financial reporting in affected firms. Conservatism fell less when shareholder or debtholder power was high, consistent with major stakeholders moderating the influence of nonofficer directors. We verify that our results stem from reductions in the asymmetric timeliness of accruals and, specifically, its current assets components. We also show that affected firms switched away from Big N auditors more often, which reduced these firms’ commitment to conservative financial reports.     

Bankruptcy,overlapping directors,and bank loan pricing

Using a sample of loan facilities borrowed by firms that share directors with bankrupt firms, this study investigates whether the overlapping directors are a transmission channel of the bankruptcy contagion effect in the bank loan market and, if so, what the underlying mechanism is. We find that firms are charged higher loan spreads in the period following the bankruptcy filing of a firm with a common director and that overlapping directors are a relevant channel for the bankruptcy contagion effect, in addition to other channels identified in literature. We also find that the negative contagion effect on loan pricing is most likely driven by the overlapping directors' reputation loss due to their involvement in bankruptcy events, and not by competing hypotheses, such as director distraction and director career concern/experience. Further analyses reveal that the adverse contagion impact on loan spreads is more pronounced when overlapping directors have greater influence over corporate policies or when their reputation is more seriously damaged. Meanwhile, the contagion effect is mitigated when interlocked firms have a higher-quality board. These results further support our evidence of the director reputation loss hypothesis. We strengthen the identification strategy to establish causality. In sum, our study identifies common directors as a channel of bankruptcy contagion effects on loan pricing and director reputation loss as an underlying mechanism.