Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.     

Board interlocks and the propensity to be targeted in private equity transactions

We examine how board networks affect change-of-control transactions by investigating whether directors’ deal exposure acquired through board service at different companies affect their current firms’ likelihood of being targeted in a private equity-backed, take-private transaction. In our sample of all US publicly traded firms in 2000–2007, we find that companies which have directors with private equity deal exposure gained from interlocking directorships are approximately 42% more likely to receive private equity offers. The magnitude of this effect varies with the influence of directors on their current boards and the quality of these directors’ previous take-private experience, and it is robust to the most likely classes of alternative explanations—endogenous matching between directors and firms and proactive stacking of board composition by management. The analysis shows that board members and their social networks influence which companies become targets in change-of-control transactions.     

Board composition,ownership structure and hostile takeovers: some UK evidence

This paper examines the relationship between internal and external control mechanisms in a sample of hostile takeover targets and a control group of non-target firms in the UK for the period 1989–93. The paper investigates whether there are significant differences in board composition, executive ownership and external shareholder control between the two groups. We find that hostile targets are more likely to have different individuals in the roles of chairman and CEO but employ non-executives with fewer additional directorships than non-targets. Executive share ownership is significantly lower in targets, suggesting that hostile bids are more likely to be pursued when target managers possess insufficient equity either to defeat the bid or make the bid too expensive for bidders. We find some evidence that institutional and unaffiliated blockholders in smaller targets help managers defeat unwanted bids.     

Board, audit committee and restatement-induced class action lawsuits

We examine the influence of monitoring provided by the board and audit committee on the probability of restatement-induced securities class action lawsuits using a sample of firms that have restated earnings in the period of 1997-2002. Logistic regression of the probability of restatement-induced class action lawsuits indicates a negative association between proportion of independent board members and the likelihood of restatement-induced class action lawsuits. We also find that when the market reacts more negatively to restatement announcements, shareholders are more likely to initiate a class action lawsuit. Finally, we document that restatement of revenues is positively associated with the likelihood of restatement-induced shareholder litigation. Our results are robust after controlling for the restatement initiator, restatements categorized as irregularities and Blue Ribbon Recommendations.     

Board Gender Diversity and Internal Control Weaknesses

We investigate the role of gender diversity on corporate boards in mitigating internal control weaknesses (ICWs). We predict and find that firms with greater female board representation are less likely to have ICWs. The results are not driven by females sitting on the audit committee. Instead, it appears that females on corporate boards reduce ICWs, regardless of whether they sit on the audit committee or not. Our results are inconsistent with the critical mass theory, showing that even one female board member could reduce the likelihood of ICWs. Taken together, the evidence is consistent with female board members' typical characteristic tendency shown in prior literature (e.g., being more likely to discuss difficult issues, more fiscally conservative, better monitors, and less tolerant of opportunistic behaviors). Our results have implications for board member selection from a policy perspective as well as board member monitoring from an investor and regulator perspective.     

Board hierarchy,independent directors,and firm value: Evidence from China

While US companies mainly list their board of directors alphabetically, this is not the case for Chinese companies, most of which list their independent directors last. We interpret the listing order of Chinese directors as board hierarchy, reflecting power allocation within the board. Based on extant evidence that independent directors contribute to firm value and that empowered individuals have more influence in group decision making, we expect independent-director rankings to be positively associated with firm value and find evidence consistent with this prediction. In our supplementary analyses we explore the mechanisms through which empowered independent directors enhance firm value. We find that independent directors who are ranked higher are more likely to vote against the management, especially on financial reporting issues. Further, higher independent-director rankings are associated with less earnings management. Our study suggests that empowering independent directors increases firm value.     

Trading Activity,Trade Costs and Informed Trading for Acquisition Targets and Acquirers

Abstract

Microstructure effects of tender offer acquisitions on targets and acquirers differentiated by listing venue and payment method are examined. Trading activity increases more for targets than for acquirers upon offer announcement. Investors are more likely to sell targets upon announcement using direct market orders against ask limit orders for cash payment offers. While target liquidity improves as spread costs fall and quoted depths increase, acquirer liquidity falls continuously to successful offer completion. Due to increased trading differences, temporary trade costs fall more for targets than for acquirers. Permanent trade costs decline over the tender offer cycle for both parties, and especially for targets for cash tender offers and for acquirers for shares tender offers. The probability of informed trading declines (remains constant) for targets (acquirers) because increased trading intensity is greater (the same) for uninformed versus informed traders. As expected, abnormal returns and changes in own-firm permanent return volatility are negatively (but weakly) and positively (and strongly) related, respectively, to changes in information asymmetry upon announcement.     

Board monitoring,director connections,and credit quality☆

Firms with poor board monitoring effectiveness receive lower credit ratings and larger credit spreads. I identify these effects by using director deaths as exogenous shocks to monitoring effectiveness. These effects are especially pronounced when firms are highly levered. Incremental decreases in monitoring effectiveness impact credit quality the most when a majority of the board members become co-opted by management and when firms are more likely to increase corporate risk.     

New Evidence on the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310

We examine the relation between a board's decision to reject antitakeover provisions of Pennsylvania Senate Bill 1310 and subsequent labor market opportunities of those same board members. Compared to directors retaining all provisions, directors rejecting all protective provisions of SB1310 are three times as likely to gain additional external directorships and are 30 percent more likely to retain their internal slot on the board of that same Pennsylvania company. For external board seats, the results are driven by nonexecutive directors who are not members of the management team; for internal board seats, the results are driven by executive directors.     

Golden Parachutes, Board and Committee Composition, and Shareholder Wealth

Takeover defense mechanisms have become common for many modern corporations. In this research, we examine one potential takeover defense mechanism, golden parachutes. In particular, the relationship between the board of directors (and the board committees) and the question of whether the parachutes are aligned with shareholder interests or are a means of entrenching management, is studied. Results show that the composition of the board of directors’ compensation committee influences the market's perceived outcome of golden parachute adoption. When insiders and affiliated outsiders dominate the board's compensation committee, negative returns are more likely to occur than when independent outsiders control the committee.     

Board meetings,committee structure,and firm value

In this study, we examine the determinants of board monitoring activity and its impact on firm value for a broad panel of firms over a six-year period from 1999 to 2005. During this period, Congress and the exchanges promulgated regulations that increased pressure upon firms for more independent and active boards. Economists have debated whether board activity and externally imposed regulations benefit or harm firms. We develop and examine several proxies for board monitoring and examine the relationship between board monitoring activity, firm characteristics, and firm value in a structural equation framework. One set of our proxies is based on the number of annual board and Audit Committee meetings. We show that prior performance, firm characteristics and governance characteristics are important determinants of board activity. We also show that the board monitoring is driven by corporate events, such as an acquisition or a restatement of financial statements. We find that board activity has a positive impact on firm value. Our results also indicate that the external pressure has had a salutary effect and recent regulations have led to some increase in firm value. A second set of proxies is based on the shift to a fully independent Audit, Compensation and Nominating Committees. We find that firms increased the independence of these Board committees following the enactment of the 2002 Sarbanes-Oxley Act.     

Length of Board Tenure and Outside Director Independence

I posit and test two competing views on the significance of outside director tenure lengths; the expertise hypothesis suggesting that extended board service time is a sign of director commitment, experience, and competence and the management‐friendliness hypothesis suggesting that extended board service time marks directors who befriend management at the expense of shareholders. I find evidence that Senior directors, defined as directors with twenty or more years of board service, are almost twice as likely to occupy a 'management‐affiliated' profession compared to the rest, and that they are also more likely to staff the firm's nominating and compensation committees. Senior director participation in the compensation committee is associated with higher pay for the CEO, especially when the CEO is more powerful in the firm. These results are consistent with the management‐friendliness hypothesis, and highlight a need for setting term limits for directors.     

Board diversity,firm risk,and corporate policies

We examine the effects of diversity in the board of directors on corporate policies and risk. Using a multidimensional measure, we find that greater board diversity leads to lower volatility and better performance. The lower risk levels are largely due to diverse boards adopting more persistent and less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity also invest persistently more in research and development (R&D) and have more efficient innovation processes. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal.     

Board tenure and firm performance

We view director tenure as an indicator of a firm's stability. Longer board tenure indicates that shareholders are satisfied with their director appointments, that the board has the relevant mix of capital, that it is effective at monitoring and advising management, and that the firm is unlikely to face operational and strategic problems that require drastic changes to its board. Using a broad sample of up to 3800 firms over a 20-year period, we show that firms with longer board tenure have higher future abnormal returns. Our evidence suggests that investors misprice board tenure: longer board tenure is associated with higher market valuations but not with higher expected returns as measured by analysts' target prices.     

The impact of possible-offer announcements on the wealth effect of target firms

The stock market materially and positively responds to released information on possible offers, likely because such announcements signal the high probability that formal bids will be offered. If potential takeover discussions are revealed earlier, then target shareholders will gain significantly lower abnormal returns around the time of when formal offers are announced. Financial bidders are less likely to approach targets with earlier possible offers; however, if they do offer possible takeovers, they need to pay incrementally higher bid premiums in their formal offers. The reform inherent in the U.K. Takeover Code of 2011 weakens a bidder’s willingness to offer possible takeovers. The pre-reform effects of possible offers on the wealth effect of targets differ from those seen after the reform.     

CEO Turnover and Retention Light: Retaining Former CEOs on the Board

Prior CEO turnover literature characterizes the board's decision as a choice between retaining versus replacing the CEO. We focus instead on the CEO's decision rights and introduce a third option in which the incumbent CEO is removed but retained on the board for an extended period, which we call Retention Light. Firms may benefit from Retention Light because former CEOs possess unique monitoring and advising abilities, but the former CEO could also exploit available decision rights for personal benefit. A Retention Light CEO's decision rights generally exceed those of CEOs who exit the firm entirely but fall short of the rights of a retained CEO. We find that when prior firm performance is better, the former CEO is more likely to be retained on the board (Retention Light) than to exit the firm. However, this relation is weaker when the CEO reaches normal retirement age at which time CEO power becomes more important. We also provide evidence on how the nature of the CEO's bargaining power varies with his personal attributes and board characteristics in its influence on the Retention Light decision. Retention Light firms are more likely than CEO‐exit firms to select a successor CEO with relatively weaker bargaining power. Finally, Retention Light involving a nonfounder CEO is negatively associated with the firm's postturnover financial performance. Overall, Retention Light is a distinct CEO turnover option that has important consequences for board decisions and firm performance.     

Board composition and operational risk events of financial institutions

We investigate the relation between board composition and operational risk events of financial institutions in the period from 1996 to 2010. Drawing from corporate governance literature, we consider the impact of board characteristics on the likelihood of operational risk events. Overall, our findings suggest that board size is negatively and non-linearly associated with the possibility of operational risk events. For the event types of “Clients, Products, and Business Practices,” and “Internal Fraud and External Fraud,” firms with a higher proportion of independent directors are less likely to suffer from fraud or failure to comply with professional obligations to clients. Our results on age and tenure heterogeneity also indicate that having a more diverse board can have an adverse impact on the board monitoring function. These results can shed new light on board demographics and operational risk management in financial institutions.     

Liquidity and Returns to Target Shareholders in the Market for Corporate Control: Evidence from the US Markets

In this paper we analyze how stock market liquidity affects the abnormal return to target firms in mergers and tender offers. We predict that target firms with poorer stock market liquidity receive larger announcement day abnormal returns based on the following considerations. First, target firms with poorer stock market liquidity receive greater liquidity improvements after a merger or tender offer. Second, deals that involve less liquid targets are less anticipated and/or more likely to be completed. Third, less liquid stocks have more diverse reservation prices across shareholders and thus require a higher takeover return. Consistent with these expectations, we show that abnormal returns to target firms’ shareholders are significantly and positively related to the difference in liquidity (measured by the bid‐ask spread) between acquirers and targets as well as the magnitude of target firms’ liquidity improvement.     

The Effect of Board Independence on Target Shareholder Wealth

We seek insights into whether, and if so how, an independent board enhances the bid premiums offered to target firm shareholders during a takeover. The results indicate that the presence of an independent board enhances the initial bid premium by, on average, 21.1%. However, the results of more refined analysis suggest that the enhanced bid premium is in fact driven by independent boards comprising non-executive directors who have reputation capital at stake. We also find that independent boards that resist takeovers or include voluntary independent expert reports in target statements, increase the bid premium revision by, on average, 15.6% and 16.2%, respectively.     

Board governance and bank performance: A meta- analysis

Using a database of 56 studies on corporate governance in the banking industry that were published between 2007 and 2019, this study performs a meta-analytic review to examine the impact of board governance on bank performance. We investigate how board size, CEO duality, outside directors, and female directors on board play a role in determining bank performance. Variations in the relationship between board governance and bank performance that attribute to moderating effects of potential moderators, including the system of corporate governance, bank performance measures, the definitions of governance variables, publication quality, and endogeneity concerns, are also encapsulated. Our study shows that bank performance is positively associated with larger boards and a high proportion of outside and female directors, supporting the resource dependence theory. We find that the moderating variables considerably alter the link between board governance and bank performance. The study offers ways to enhance board effectiveness by enforcing governance practices in the banking systems based on each countries’ legal and institutional framework and suggests reconsidering mandates for smaller boards and duality on boards of banking firms.