Corporate Governance and Takeover Outcomes

• Published date: 01 May 2016
• Date: 01 May 2016
• Author: Nihat Aktas,Serif Aziz Simsir,Ettore Croci
• DOI: http://doi.org/10.1111/corg.12116

Corporate Governance and Takeover Outcomes

Nihat Aktas, Ettore Croci*and Serif Aziz Simsir

ABSTRACT

Manuscript type: Review

Research Question/Issue: This article reviews how and through which channels corporate governance shapes takeover

outcomes.

Research Findings: We summarizethe main findings of the empirical literature that investigates the effect of corporate gover-

nance mechanismson takeover outcomes. The internal and externalgovernance mechanisms that we consider are: the boardof

directors, the takeover market, blockholders, financial markets in general, product market competition, and the labor market.

Theoretical/Academic Implications: This article adopts an agency perspective ofthe firm and reviews the mergers and acqui-

sitions (M&A) literature throughthe lens of corporate governance.We highlight how the different corporategovernance mech-

anisms affect the takeover process and outcomes.

Practitioner/P olicy Implication s: The article systematizes the current state of the research linking corporate governance and

takeovers. In doing so,we emphasize which mechanisms policymakers can use to improve the efficiency of the takeover mar-

ket. Alternatively,the review also offersindications concerning mechanisms that could be usedto mitigate agency conflictsand,

as such, increase firm value.

Keywords: Corporate Governance, Takeover, Board of Directors, Blockholder, Product Market Competition

INTRODUCTION

Corporate takeovers are one of the most important corpo-

rate events with tremendous implications for the realloca-

tion of resources among firms (Harford & Li, 2007). Netter,

Stegemoller, and Wintoki(2011) report that the average annual

aggregate deal values of US acquirers from 1992 to 2009 was

$928 billion, with a peak value of $1,806 billion in 1998. After

a substantial drop in takeover activity during the financial cri-

sis, the US mergers and acquisitions market reached new

heights in 2014 with a total of $2,034 billion announced deal

values [source: Thomson-Reuters]. An important aspect of

mergers and acquisitions (M&A) is that they tend to intensify

the potential conflict of interest between managers and share-

holders in large listed companies (Jensen & Meckling, 1976).

Early studies focusing on deals consummated between

public firms note that, on average, gains to acquirer firm

shareholders around the deal announcement dates tend to be

negative or, at best, zero (Jensen & Ruback, 1983). Apart from

several recent studies identifying value increasing deals in spe-

cific subsamples (such as acquisitions by small bidders, acquisi-

tions of private targets, and deals financed withcash), in almost

half of the deals, acquirers earn negative abnormal returns (for

a review of these studies, see Betton, Eckbo, & Thorburn,

2008).

1

For instance, Moeller, Schlingemann, and Stulz (2004)

report an aver age acquirer an nouncemen t return of +1.1 pe r-

cent for a large sample of US deals announced from 1980 to

2001. However, in monetary value, this average gain translates

into an average loss of $25.2 million upon announcement, sug-

gesting the existence of a strong size effect (i.e., with large

acquirers completing, on average, worse deals than smaller

ones). The evidence in Moeller, Schlingemann, and Stulz

(2005) is even more striking. They find an aggregate loss for ac-

quiring firms’shareholders of $216 billion from 1991 to 2001.

The literature has proposed several explanations as to why

acquirerstend to break even and why a substantialproportion

of deals lead to negative returns for acquirer shareholders at

the merger announcement dates. Someof the proposed expla-

nations include competition in the M&A market (Bradley,

Desai, & Kim, 1988),the free rider problem (Grossman& Hart,

1980), CEO hubris (Roll, 1986), price pressure from hedge

funds (Mitchell, Pulvino, & Stafford, 2004), andrational over-

bidding (Akdogu, 2011). According to Jensen (1986), firms

with greater free cash flow, but no significant investment

opportunities are more likely to undertake value-destroying

acquisitions rather than returning cash to the shareholders

(i.e., the free cashflow hypothesis). In support of the free cash

flow hypothesis, Lang, Stulz, and Walkling (1991) provide

evidence that the acquiring firm’s operating cash flow is neg-

atively associated with announcement abnormal returns.

Harford (1999), focusing on cash holdings, indicates that

cash-rich firms undertake poorer deals than their cash-poor

counterparts. Therefore, given that the potential for value de-

struction is high, M&A transactions require strict monitoring,

*Address forcorrespondence: Ettore Croci,Università Cattolica del SacroCuore. Largo

Gemelli 1, 20123 Milan, Italy. Tel.: +39-02 7234 3012; Fax: +39-02 7234 2670; E-mail:

ettore.croci@unicatt.it

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12116

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Corporate Governance: An International Review, 2016, 24(3): 242 –252