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.     

Director gender and mergers and acquisitions

Does director gender influence CEO empire building? Does it affect the bid premium paid for target firms? Less overconfident female directors less overestimate merger gains. As a result, firms with female directors are less likely to make acquisitions and if they do, pay lower bid premia. Using acquisition bids by S&P 1500 companies during 1997–2009 we find that each additional female director is associated with 7.6% fewer bids, and each additional female director on a bidder board reduces the bid premium paid by 15.4%. Our findings support the notion that female directors help create shareholder value through their influence on acquisition decisions. We also discuss other possible interpretations of our findings.     

Target Information Asymmetry and Acquisition Price

This study investigates the effects of target information asymmetry in a takeover transaction. We find that a target with more information asymmetry receives a larger bid premium from the acquirer. We examine the response of the acquirer's investors to the bid to clarify whether the larger bid premium is an overpayment by the acquirer. We observe that the acquirer's investors respond more positively to the acquisition of an opaque target, indicating that the market recognizes the acquirer's valuation of the opaque target and agrees with the offer price. Our results indicate that corporate takeovers help to resolve asymmetric information in the capital market.     

The role of institutional investors in public-to-private transactions

In Italy, as in many other European countries, listed firms will normally go dark through controlling owner-initiated tender offers. We find that institutional investors play a central role in the bid process and can protect minority shareholders from being frozen out in the bid. Specifically, tender offers are less likely to succeed when a firm has institutional investors in its ownership structure. When public-to-private offers are accepted, bid premiums are significantly greater if a financial institution (particularly when it is foreign, independent or activist) has a stake in the firm. We explore the effect of a number of hitherto unexplored factors on the takeover premium and find that shareholder agreements facilitate public-to-private acquisitions. Other factors, such as a threat to merge the target if the bid fails, or external validation of the offer price, have no impact on either the likelihood of delisting or the premium paid by the bidder.     

THE ACTIVE BOARD OF DIRECTORS AND ITS EFFECT ON THE PERFORMANCE OF THE LARGE PUBLICLY TRADED CORPORATION

In recent years, boards of directors have become more active and independent of management in pursuing shareholder interests. But, up to this point, there has been little empirical evidence that active boards help companies produce higher rates of return for their shareholders. In this article, after describing the new board activism, the authors argue that past failures to document an association between independent boards and superior corporate performance can be explained by two features of the research: its concentration on periods prior to the 1990s (when most boards were largely irrelevant) and its use of unreliable proxies (such as a minimum percentage of outside directors) for a well-functioning board.
The authors hypothesize that an independent and resourceful board takes steps that require management to increase earnings available to investors. To test this hypothesis, the performance of a sample of large U.S. corporations was examined over the period 1991-1995 using two proxies for the "professionalism" of each company's board: (1) the letter grades (A+ to F) assigned by CalPERS for corporate governance; and (2) a "presence" or "absence" grade based on three key indicators of professional board behavior. Both of these governance metrics were associated in statistically significant ways with superior corporate performance, as measured by earnings in excess of cost of capital and net of the industry average. While acknowledging that such results do not prove causation, the authors conclude that, in the first half of the 1990s, corporations with active and independent boards added significantly more value for shareholders than those with passive, "rubber-stamp" boards.     

The role of directors with related supply chain industry experience in corporate acquisition decisions

We examine the extent to which directors with supply chain experience (DSCs) on corporate boards create informational advantages that improve strategies and outcomes related to mergers and acquisitions (M&A). Our results suggest that DSCs play a dual role by motivating value-enhancing acquisitions while simultaneously deterring value-destroying ones. The nature and extent of these effects depend on such factors as the size of the acquiring firm and the level of uncertainty in its operating environment. Furthermore, we find that DSCs are positively associated with abnormal announcement returns. Acquirers with at least one DSC outperform their counterparts without DSCs by 3.1% during a three-day window around the announcement. Our results hold after we address endogeneity concerns using multiple methods. Finally, we show that acquirer board representation by DSCs is positively related to post-merger operating performance and negatively related to the premium paid for the target.     

Board and Monitoring Committee Independence

This study focuses on the composition of boards of directors and their monitoring committees (audit and compensation) for large Australian companies. For firms whose boards use a committee structure, much of the monitoring responsibility of the board is expected to rest with the independent committee members. We document a positive association between the proportion of independent directors on the full board and its monitoring committees, and a greater proportion of independent directors on both audit and compensation committees than the full board. Our hypotheses tests involve an examination of the impact of other mechanisms used to control agency conflicts on full board and committee independence, and the association between this independence and firm value. We find that full board independence is associated with low management ownership and an absence of substantial shareholders. Audit committee independence is associated with reduced monitoring by debtholders when leverage is low. While we predict a positive relationship between board and monitoring committee independence and firm value, our results do not support this conjecture.     

Board composition, regulatory regime and voluntary disclosure

This study, which examines the association between board monitoring and the level of voluntary disclosure, finds new evidence that firms with a higher proportion of independent directors on the board are associated with higher levels of voluntary disclosure. Although board size and CEO duality are not associated with voluntary disclosure, boards with a majority of independent directors have significantly higher levels of voluntary disclosure than firms with balanced boards. Notably, we find that the presence of an external governance mechanism, the regulatory environment, enhances the strength of the association between the proportion of independent directors and the level of voluntary disclosure. This association is some two to three times greater under a “disclosure-based” regulatory regime than under a “merit-based” regulatory regime.     

Market Illiquidity and Conditional Equity Premium

We examine the time‐series relation between aggregate bid‐ask spreads and conditional equity premium. We document that average marketwide relative effective bid‐ask spreads forecast aggregate market returns only when controlling for average idiosyncratic variance. This control allows us to document the otherwise elusive relation between illiquidity and returns. The reason is that idiosyncratic variance correlates positively with spreads but has a negative effect on conditional equity premium, causing an omitted variable bias. Our results are robust to standard return predictors, alternative illiquidity measures, and out‐of‐sample tests. These findings are important because they provide strong support for the literature's conjecture that marketwide liquidity is an important asset pricing risk factor.     

Australian evidence on the determinants and impact of takeover resistance

In the present paper, we examine the determinants and impact of target bid resistance on the wealth of target shareholders and the takeover process in Australia. We find that bid resistance increases target shareholder wealth in the post‐announcement period and that the probability of bid hostility increases with the target's size, decreases with the target's performance and is unrelated to the size of the premium offered by the bidder. We also find that bid hostility decreases the probability of bid success, increases the probability of bid revision and has no effect on the probability of competing bidders entering the market.     

The impact of cultural diversity in corporate boards on firm performance

We examine the impact of cultural diversity in boards of directors on firm performance. We construct a measure of national cultural diversity by calculating the average of cultural distances between board members using Hofstede's culture framework. Our findings indicate that national cultural diversity in boards negatively affects firm performance measured by Tobin's Q and ROA. These results hold after controlling for potential endogeneity using firm fixed effects and instrumental variables regressions. Further, the results are robust to controlling for a wide range of board and firm characteristics, including various measures of “foreignness” of the firm, alternative culture frameworks, and other measures of culture. The negative impact of cultural diversity on performance is mitigated by the complexity of the firm and the size of foreign sales and operations. In addition, we find that the negative effects of cultural diversity are concentrated among the independent directors. Finally, we find that not all aspects of cultural differences are equally important and that it is mainly the diversity in individualism and masculinity that affects the effectiveness of boards of directors.     

UNITARY BOARDS AND MUTUAL FUND GOVERNANCE

A unique governance structure for mutual funds is unitary board—one board overseeing all funds in the entire family. We find strong evidence for unitary board as an effective governance mechanism. Funds with unitary boards are associated with lower fees, are more likely to pass the economies of scale benefits to investors, are less likely to be involved in trading scandals, and rank higher on stewardship. In contrast, funds with larger or more independent boards charge higher fees and rank lower on stewardship. Our findings indicate that unitary boards of small size, rather than independent boards, may be more beneficial to fund shareholders.     

Board Composition, Board Effectiveness, and the Observed Form of Takeover Bids

We show that bidding firms consider target board characteristicswhen deciding takeover offer types and initial offer premiums.We study a sample of 436 proposed negotiated mergers and bypassoffers. Firms with individuals holding the titles of both chiefexecutive officer (CEO) and board chair are more likely to receivebypass offers. These offers are more likely to be successfuland generate higher target shareholder gains over the takeoveroffer period. When the target's board is independent, the targetis less likely to receive a high premium and the offer is lesslikely to succeed.     

Co-opted boards and capital structure dynamics

This study examines the effects of co-opted directors and further tests the monitoring effectiveness of non-co-opted independent directors and co-opted independent directors on capital structure decisions. Employing a large sample of 2548 US firms over the 1996–2015 period, we find strong evidence that co-opted boards exert a positive and significant influence on firms' financial leverage. We also find that, whereas co-opted independent directors are positively associated with financial leverage, non-co-opted independent directors have a negative influence on a firm's leverage ratio, suggesting that co-option weakens the effective monitoring, thereby increasing the firm's leverage ratio. Further analysis indicates that co-opted boards adjust towards target leverage levels at a faster speed, with a half-life within a year for book and market leverage. Lastly, our results show that the agency costs of managerial discretion and stockholder-bondholder conflicts arising from board co-option are important drivers of financial leverage relative to tax incentives. Our results are robust to alternative measures of board co-option, financial leverage, and endogeneity concerns.     

Corporate board and board committee independence,firm performance,and family ownership concentration: An analysis based on Hong Kong firms

This study examines whether the relationship between corporate board and board committee independence and firm performance is moderated by the concentration of family ownership. Based on a sample of Hong Kong firms, we find no significant association between the independence of corporate boards or board committees and firm performance in family firms, whereas board independence is positively associated with firm performance in non-family firms. Additionally, our findings show that the proportion of independent directors on the corporate boards of family firms is lower than that of non-family firms, but we find no significant difference in the representation of independent directors on the key committees of corporate boards between family and non-family firms. Overall, these results suggest that the “one size fits all” approach required by the regulatory authorities for appointing independent directors on corporate boards may not necessarily enhance firm performance, especially for family firms. Thus, the requirement to appoint independent directors to the corporate boards of family firms needs to be reconsidered.     

Irrevocable Commitments,Going Private and Private Equity

This paper adds to growing interest in public to private buy‐outs and mechanisms to ensure bid success. Using a unique, hand‐collected dataset of 155 public to private buy‐outs we provide one of the first examinations of the determinants of irrevocable commitments. Irrevocable commitments involve undertakings given by existing shareholders to agree to sell their shares to the bidder before the bid to take the company private is announced. We find that, for management buy‐outs, the level of irrevocable commitments is increased by the bid premium, the reputation of the private equity backer and board shareholdings. The level of irrevocable commitments is reduced by rumours of a takeover bid and bid value. We therefore find evidence that management and private equity firms' activity prior to the bid's announcement can have an important impact on the process of going private.     

The Impact of Go‐Shop Provisions in Merger Agreements

We examine whether go‐shop provisions in merger agreements are used to benefit target shareholders or for agency/entrenchment reasons. We find that go‐shop provisions are more likely in deals involving the negotiation selling method, financial buyers and all cash financing, and in targets with less valuation uncertainty. We confirm that go‐shops have a positive association with the initial offer premium. Results suggest that deals with go‐shop provisions are more likely to have a competing bid and an upward revision of the initial offer premium. Collectively, our results indicate that go‐shops are effective contractual devices used to further target shareholder interests.     

OPTIMAL BIDDING FOR TENDER OFFERS

By modeling tender offers as auctions in which bidders arrive sequentially, I show that the first bidder includes a high premium in its opening bid in an attempt to freeze out potential competitors. When expected competition goes up, the premium offered increases as does target shareholder welfare, while bidders suffer. Also, total synergy gains generated increase with competition. Including a premium in the opening bid remains optimal for the first bidder when target management is permitted to resist. Target management's ability to resist, though, benefits target shareholders even when resistance is not actually observed. When agency costs are introduced, the effect of managerial resistance on target shareholder welfare becomes ambiguous.     

Board changes and CEO turnover: The unanticipated effects of the Sarbanes–Oxley Act

The board independence requirements enacted in conjunction with the Sarbanes Oxley Act of 2002 (SOX) provided motivation for firms that were already compliant with the regulations to alter their board structure. We consider actual board changes made by compliant firms and how such changes affect the monitoring efficiency of the boards. We find that the majority of compliant firms (approximately 56%) add independent directors following SOX. However, we find a nontrivial number of firms (approximately 26%) actually decrease the number of independent directors to move closer to the stated 50% requirement. For firms that decrease independence, the CEO turnover performance sensitivity significantly decreases following SOX. We also find that large board independence changes seem to be most detrimental to the monitoring function of the board. Our results highlight that SOX may have had unintended consequences.     

AN EMPIRICAL ANALYSIS OF SOME DETERMINANTS OF THE TARGET SHAREHOLDER PREMIUM IN TAKEOVERS

While a considerable amount of research in Australia, the United States and elsewhere shows that takeovers create value for target shareholders, there is relatively little research investigating the explanations for cross-sectional differences in the size of the premium paid to target shareholders. This paper tests various arguments proposed to explain some of the sources of this premium. One such explanation is the removal of inefficient target management. Takeovers have been recognised as a mechanism that allows management teams to compete for the right to manage corporate assets. We test the associations between bidder and target managerial ownership (proxied by director's holdings), the prior performance of the bidder and target and the size of the premium paid to target shareholders. Other potential influences on the premium include a reduction in the agency costs of free cash flow and the provision of financial slack or reserve borrowing capacity to the target firm by the bidder. Using a sample of seventy-eight Australian takeovers occurring between 1981 and 1989 our tests indicate that the provision of financial slack to the target is associated with a significantly higher premium, while high bidder ownership results in a significantly lower premium. The premium is found to be positively related to the performance of the bidder in the period prior to the bid. The tests disclose an association between the agency costs of free cash flow and the target premium which is inconsistent with the theory, and reveal only weak evidence that the takeover premium is higher when inefficient target management is removed.