Operating performance changes associated with corporate mergers and the role of corporate governance

We find that corporate governance characteristics of acquiring firms (board ownership, board size, and block-holder control) have an economically and statistically significant impact on operating performance changes following mergers. We also show that dispersion of intra-board ownership stakes is an important but heretofore overlooked factor when judging the influence of ownership on the outcomes of corporate choices. Finally, we present evidence that suggests the market sometimes under- or overreacts to merger news when initially revaluing merger partners but corrects any miscalculation following the consummation of the merger.     

Bank board structure and performance: Evidence for large bank holding companies

The subprime crisis highlights how little we know about bank governance. This paper addresses a long-standing gap in the literature by analyzing the relationship between board governance and performance using a sample of banking firm data that spans 34 years. We find that board independence is not related to performance, as measured by a proxy for Tobin’s Q. However, board size is positively related to performance. Our results are not driven by M&A activity. But, we provide new evidence that increases in board size due to additions of directors with subsidiary directorships may add value as BHC complexity increases. We conclude that governance regulation should take unique features of bank governance into account.     

Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature

This paper provides a review of the recent financial institution mergers and acquisition (M&A) literature covering over 150 studies. Several robust themes emerge in the post-2000 literature. North American bank mergers are (or can be) efficiency improving, although the event-study literature presents a mixed picture regarding stockholder wealth creation. In contrast, European bank mergers appear to have resulted in both efficiency gains and stockholder value enhancement. There is robust evidence linking high CEO compensation to merger activity and strong implications that deals can be motivated by the desire to obtain ‘too-big-to-fail’ status and reap the associated subsidies. Evidence on the impact of both geographic and product diversification via merger is mixed. There is growing evidence that financial institution M&As can adversely impact certain types of borrowers, depositors, and other external stakeholders.     

Cross-border bank mergers: What lures the rare animal?

Although domestic mergers and acquisitions (M&As) in the financial services industry have increased steadily over the past two decades, international M&As were until recently relatively rare. Moreover, the share of cross-border mergers in the banking industry is low compared with other industries. This paper uses a novel dataset of over 3000 mergers that took place between 1985 and 2001 to analyze the determinants of international bank mergers. We test the extent to which information costs and regulations hold back merger activity. Our results suggest that information costs significantly impede cross-border bank mergers. Regulations also influence cross-border bank merger activity. Hence, policy makers can create environments that encourage cross-border activity, but information cost barriers must be overcome even in (legally) integrated markets.     

Consolidation and value creation in the insurance industry: The role of governance

We examine the long run performance of M&A transactions in the property–liability insurance industry. We specifically investigate whether such transactions create value for the bidders’ shareholders, and assess how corporate governance mechanisms, internal and external, affect such performance. Our results show that M&A create value in the long run as buy and hold abnormal returns are positive and significant after 3 years. While tender offers appear to be more profitable than mergers, our multivariate evidence does not support the conjecture that domestic transactions create more value than cross-border transactions. Furthermore, positive returns are significantly higher for frequent acquirers and in countries where investor protection is weaker. Internal corporate governance mechanisms, such as board independence, and CEO share ownership, are also significant determinants of the long run positive performance of bidders.     

Measuring Takeover Premiums in Cross-Border Mergers and Acquisitions: Insights from Turkey

We investigate whether the merger announcement dates provided in a popular mergers and acquisitions (M&A) database, SDC, serve as accurate event dates for estimating the wealth effects of mergers on target firms located in Turkey. We find that 74 percent of SDC’s merger announcement dates are preceded by merger-related events such as merger rumors, target firms’ search for potential acquirers, and early-stage merger negotiation announcements. Target cumulative abnormal return (CAR) estimates around these early dates are almost twice as large as the CAR estimates around SDC’s merger announcement dates. We argue that our findings have implications for the recently flourishing cross-border M&A literature.     

Aggressive CEOs and bank mergers and acquisitions

The U.S. banking industry has seen waves of mergers since the 1980s. Despite a significant body of research on the determinants of these waves, there are few studies of how CEOs influence banks’ mergers and acquisitions (M&As). This paper studies the effect of CEO aggressiveness on bank M&As. We construct a new measure of bank CEO aggressiveness based on CEOs’ ancestral countries of origin and data on inter-country wars. We find that aggressive CEOs are more likely to acquire other banks. Moreover, the impact of CEO aggressiveness on bank M&A decisions is more pronounced when the CEOs are from larger and more profitable banks, when CEOs have a longer tenure, and when CEOs’ ancestral country of origin has a more masculine culture. Moreover, we show that aggressive CEOs are more likely to make acquisitions when CEOs possess more cultural maintenance, which captures the extent to which CEOs retain their original cultural values and beliefs. Finally, we document positive short-term stock market reactions to bank M&As initiated by aggressive CEOs.     

Does Financial Restructuring Change the Relationship Between Corporate Governance and the Static and Dynamic Efficiency of Bank Mergers in Taiwan?

Taiwan's Financial Restructuring Fund Statute was enacted in 2001. This study is unique in simultaneously considering Taiwan's corporate governance, bank mergers, and the financial restructuring scheme. Unlike other literature that investigates only the characteristics of corporate governance that affect the concurrent static efficiency of bank mergers, we further use the dynamic slacks-based measure to examine the persistent and intertemporal effects on the dynamic efficiency of bank mergers. The results of this study show that major shareholders of acquiring banks have greater controlling power to decide whether to merge during the financial restructuring period. A bank merger using the financial restructuring scheme has less static and dynamic efficiency in the short run but gradually increased static and dynamic efficiency in the long run. Such an observation is consistent with the hypothesis that controlling shareholders pursue long-term efficiency in a bank merger.     

Indexing mergers and acquisitions

We measure the efficiency of mergers and acquisitions by putting forward an index (the ‘M&A Index’) based on stochastic frontier analysis. The M&A Index is calculated for each takeover deal and is standardized between 0 and 1. An acquisition with a higher index encompasses higher efficiency. We find that takeover bids with higher M&A Indices are more likely to succeed. Moreover, the M&A Index shows a strong and positive relation with the acquirers’ post-acquisition stock performance in the short run and operating performance in the long run. After constructing three portfolios under a buy-and-hold strategy, we find that efficient portfolios with the highest indices earn higher equity returns and monthly alphas than inefficient portfolios with the lowest indices. Overall, our findings indicate that the M&A Index is positively associated with merger outcomes for acquirers.     

Debt Issues around Mergers & Acquisitions

We investigate firms’ debt financing choices among bank loans, public bonds and privately placed debt around mergers and acquisitions (M&As). We find that prior to M&As, firms with above-optimal leverage tend to pursue arm’s-length debt financing in lieu of bank debt. We find that three-day CARs for highly levered firms and acquirer’s long-run performance are negatively associated with non-bank financing. This supports a monitoring avoidance hypothesis for highly levered firms’ non-bank debt financing decisions in M&As. As a falsification test, we do not find the same debt financing considerations of acquirer firms during their post-M&A period.     

Managerial ownership,board monitoring and firm performance in a family‐concentrated corporate environment

Using data from Hong Kong, a market that has family‐concentrated ownership structure, we examine the relation between managerial ownership, the board of directors and firm performance. We first conduct analysis on the managerial ownership and firm performance to derive the turning points where either ‘convergence of interest’ or ‘entrenchment’ effect of managerial ownership is dominant. Based on these estimated turning points, we find that at low and high level of ownership, effective board mitigates the entrenchment effect associated with managerial ownership; at medium level of ownership, board effectiveness is less demanded. These findings suggest that managerial ownership and board monitoring are substitutes in mitigating the agency problem between managers and shareholders. We also find that effective board curbs the excessive compensation by entrenched managers to themselves at low level of managerial ownership.     

State ownership and market liberalization: Evidence from China's domestic M&A market

We study how state ownership affects the post-merger performance of Chinese acquirers, and find that state owned acquirers (SOEs) experience a significantly larger long-term performance improvement following mergers compared to their non-state-owned (NSOE) counterparts. When partitioning the sample period into acquisitions made prior to and following China's split-share reform of 2005, we find that the post-merger performance improvement of SOE acquirers is largely attributed to the post reform period in which controlling shareholders converted their non-tradable shares into tradable status. Our results are consistent with the interpretation that state intervention in the form of capital market liberalization and alleviation of governance problems, combined with political connections and privileged access to financing, may have a positive effect on M&A performance that outweighs the inefficiency cost of state ownership in China.     

The market valuation of M&A announcements in the United Kingdom

This paper investigates the short-term market reaction to UK acquirers announcing domestic and foreign mergers and acquisitions (M&As) from 2000 to 2010. We define acquirers as value, moderate and glamour acquirers based on equally weighted market-to-book terciles. We find that value acquirers outperform glamour acquirers during and after the M&A announcement. We also focus on the impact of institutional ownership and find that higher domestic, foreign and total institutional ownership leads to lower market reaction to M&A announcements. We also find that long-term institutional investors lead to a higher post-announcement market performance. Finally, we find that greater domestic institutional ownership mitigates the typical poor short-term performance following M&A announcements of glamour acquirers.     

The impact of institutional investors on mergers and acquisitions in the United Kingdom

In this paper we investigate the impact of institutional ownership on UK mergers and acquisitions. We employ a comprehensive sample of M&As conducted by UK acquirers from 2000 to 2010, thus including a full cycle of peak and trough in M&A waves. We find that institutional investors increase the likelihood of an M&A to be a large, cross-border deal, opting for full control. Moreover, institutional ownership concentration and foreign institutional ownership increase the likelihood of cross-border M&As. In addition, we assess the influence of institutional shareholders’ investment horizon and find that while investment horizon have a negative influence in encouraging cross-border M&As, the presence of long-term investors encourages larger M&As. Finally, even after controlling for the 2007–08 financial crisis the market reacts negatively to the announcement of cross-border M&As.     

Governance mechanisms in Spanish banks. Does ownership matter?

This paper examines the governance of Spanish banks regarding two main issues. First, does poor economic performance activate governance interventions that favor the removal of executive directors and the merger of non-performing banks? And, second, does the relationship between governance intervention and economic performance vary with the ownership form of the bank? We find a negative relationship between performance and governance intervention for banks, but the results change for each form of ownership and each type of intervention. Internal-control mechanisms work for Independent Commercial banks, but Savings banks show weaker internal mechanisms of control and the only significant relationship between performance and governance intervention that appears is for mergers. The Spanish Savings banks, with a peculiar form of ownership that, in fact, implies a lack of ownership, give voice to several stakeholder groups with no clear allocation of property rights. Nevertheless, their economic performance is not generally affected. Product-market competition compensates for those weaker internal governance mechanisms, and non-performing banks are not fully protected from disappearing.     

The internationalization of Chinese companies: Firm characteristics, industry effects and corporate governance

A prominent issue in the internationalization of Chinese firms is that many are state-owned enterprises (SOEs) and that corporate governance in China is highly idiosyncratic. This paper identifies firm characteristics, industry effects and corporate governance mechanisms that foster internationalization. We find that Chinese cross-border mergers create shareholder value, but not more than domestic expansions. Corporate governance mechanisms matter, jointly and individually. While state-ownership predicts fewer cross-border mergers, a favourable board structure and corporate transparency explains higher M&A returns. As in more mature markets, firm- and industry-specific determinants also affect M&As in China.     

LABOR MARKET CONSEQUENCES FOR BUSY DIRECTORS: EVIDENCE FROM INTERNATIONAL MERGERS AND ACQUISITIONS

Using 13,233 acquisitions from 57 countries, we examine merger and acquisition (M&A) decisions made by busy boards. We find that few busy acquirers originate from emerging markets and that they tend to undertake cross‐border mergers, favor public targets, finance with cash and equity, pursue nondiversifying mergers, avoid targets with multiple bidders, and long‐term underperform relative to nonbusy acquirers. Importantly, we discover a nonlinear relation between an acquirer's board busyness and merger announcement returns. We find that the labor market penalizes directors who approve bad acquisitions but does not reward them for good mergers. We find a similar nonlinear relation between an acquirer's board busyness and its long‐term performance along with a suggestion of an optimal board busyness.     

The impact of firm ownership,board monitoring on operating performance of Chinese mergers and acquisitions

In this paper, we employ board monitoring mechanisms and within-firm governance variables to investigate the operating performance of 340 mergers and acquisitions in China over the 2004–2011 period. Our results document a significant deterioration in post-acquisition operating performance of acquiring firms over 12–36 months. We find independent directors, managerial shareholding, ownership concentration have a positive and significant impact on operating performance of acquiring firms. However, the related party transactions exert a negative and significant effect on matched control adjusted ROA. Further analysis of our sub-sample indicates that privately owned enterprises are better monitors compared to the state owned enterprises.     

Riding the merger wave: Uncertainty,reduced monitoring,and bad acquisitions

We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts' forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.     

Toward a complete definition of relatedness in merger and acquisition transactions

The interrelation between different sources of relatedness in M&A transactions has been largely overlooked in extant literature. This paper offers theoretical and empirical investigation and introduces a few new measures of relatedness. We find that single-dimensional measures of relatedness are complements, not substitutes, of each other, and their impacts on the market’s reaction are additive and interdependent. Specifically, each measure contains unique relatedness information and the market’s perception of, and reaction to, the presence of relatedness in M&A deals is more sophisticated than the extant literature prescribes. The market seems to reward operational and marketing relatedness in small-vicinity mergers and out-of-state mergers. In contrast, related in-state mergers seem to be associated with a significantly negative market reaction. Similarly, technology affiliation induces an additional positive market reaction that is separate from simple industry matching, and the market seems to reward the acquisition of high-technology targets by high-technology acquirers and to penalize the acquisition of high-technology targets by non-high-technology acquirers. Furthermore, we find that horizontally and vertically related mergers are relatively more likely to be completed, while in-state and large-vicinity mergers are less likely to be completed. We also find that when the target is incorporated in a target-friendly state, the merger is less likely to be completed, though state-specific merger laws do not contribute significantly to mergers’ valuation. Taken together, our results indicate that relatedness is a multidimensional metric composed of several interrelated components, and, thus, single-dimensional proxies are not sufficient to capture relatedness accurately and completely.