A structural event study for M&As: an application in corporate governance

We apply structural event study methodology in the context of corporate governance to account for the interaction of two merger and acquisition (M&A) effects: synergy (total value) and dominance (bargaining power). The interaction of these effects simultaneously determines the parties’ abnormal returns. We posit that M&A synergy effects correspond to changes in agency costs between target’s management and target’s shareholders, while the dominance effects correspond to the balance of power between acquirer and target during negotiations. Our structural estimates suggest that more stable or entrenched directors generate higher value during normal operations but are softer negotiators when their firm becomes an acquisition target.