Corporate governance “bundles” and firm acquisitiveness

• Published date: 01 July 2021
• Author: Evridiki Panayi,Konstantinos Bozos,Gianluca Veronesi
• Date: 01 July 2021
• DOI: http://doi.org/10.1111/corg.12371

ORIGINAL ARTICLE

Corporate governance “bundles”and firm acquisitiveness

Evridiki Panayi

1

| Konstantinos Bozos

1

| Gianluca Veronesi

2

1

Leeds University Business School, University

of Leeds, Leeds, UK

2

School of Management, University of Bristol,

Bristol, UK

Correspondence

Konstantinos Bozos, Leeds University Business

School, The Maurice Keyworth Building, The

University of Leeds, LS2 9JT, Leeds, UK.

Email: k.bozos@leeds.ac.uk

Abstract

Research Question/Issue: We explore how the interrelations of governance mech-

anisms (“bundles”) influence a firm's propensity for corporate acquisitions. Focus-

ing on four key internal and external mechanisms, namely, board of directors

monitoring, CEO pay incentives, takeover market discipline, and institutional inves-

tor monitoring, we use a sample of 1171 completed M&A deals by 799 U.S. firms

during the period 1998–2015 to test the Substitution versus Complementarity

Hypotheses.

Research Findings/Insights: The findings provide, in the main, support for both the

Substitution and the Complementarity Hypotheses, with several incentives alignment,

internal and external monitoring mechanisms acting as substitutes and complements

of each other toward firm acquisitiveness.

Theoretical/Academic Implications: Our results challenge the notion that corporate

governance mechanisms purely function as independent factors and contribute to

the configurational perspective of corporate governance. They offer new evidence

that combinations or “bundles”of firm-level governance mechanisms can allow for

differing degrees of firm acquisitiveness.

Practitioner/Policy Implications: Different governance “bundles”will have different

implications for major strategic decisions such as corporate acquisitions. Firms seek-

ing to control or increase acquisition propensity can thus consider “equifinal”gover-

nance configurations, whereby alternative combinations of governance mechanisms

can lead to comparable, desired outcomes.

KEYWORDS

Corporate governance, acquisitions, substitution, complementarity, governance bundles,

configurational perspective

1|INTRODUCTION

Mergers and Acquisitions

1

(hereafter referred to as M&A) are among

the most significant corporate investments employed by firms in the

pursuit of growth and shareholder wealth creation. Although there is

a significant body of research across academic disciplines on the

determinants of corporate acquisitions, this research has been rather

disparate in identifying the relative importance of different drivers

and how multiple drivers may simultaneously work in influencing firm

acquisitiveness (Haleblian et al., 2009; Laamanen, 2007). Accordingly,

Haleblian et al. (2009) emphasize the need for additional evidence on

the influence of governance mechanisms, such as board structure,

executive compensation, and blockholder ownership on firm acquisi-

tion behavior.

Received: 13 November 2019 Revised: 19 January 2021 Accepted: 25 February 2021

DOI: 10.1111/corg.12371

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reprodu ction in any medium,

provided the original work is properly cited.

© 2021 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

402 Corp Govern Int Rev. 2021;29:402–426.wileyonlinelibrary.com/journal/corg

Corporate acquisitions represent major and discrete strategic

events, but they have also been argued to exacerbate the inherent

conflicts of interest between shareholders and managers in large pub-

lic firms (Jensen, 1986; Masulis et al., 2007; Morck et al., 1990). M&A,

for instance, can be the result of managerial self-interest, inconsistent

with shareholder value maximization, such as empire building

(e.g., Andrade et al., 2001; Jensen, 1986) and employment risk reduc-

tion (Amihud & Lev, 1981). Acquisition decisions can be the source of

a wide divergence of interests between shareholders and managers

and, therefore, have been frequently investigated using the agency

theory lens, which is also very popular in governance research

(Jensen & Meckling, 1976). A number of recent studies in the empiri-

cal literature further supports the notion that corporate acquisitive-

ness ranks highly in both finance and management research agendas

in relation to behavioral, decision-making, gender-related, and person-

ality dimensions (Huang & Kisgen, 2013; Jenter & Lewellen, 2015;

Shi et al., 2017; Yim, 2013). Irrespective of their short- and long-term

outcomes, acquisition decisions represent a conduit for managerial

risk-taking, opportunism, and agency issues. Thus, the M&A frame-

work provides a suitable setting to explore the role of governance in

influencing corporate investment policy.

The relationship between corporate governance mechanisms and

firm performance has long been at the center of governance scholar-

ship. However, the evidence from this prolific research has yielded

mixed results. For example, studies of the effects of board characteris-

tics (e.g., board independence, leadership, and structure) and owner-

ship structure on corporate financial performance have failed to

provide consistent evidence of significant and systematic effects

(e.g., Dalton et al., 1998; Dalton et al., 2007; Deutsch, 2005). The fact

that the extant literature has produced mixed and inconsistent results

is due, at least in part, to the examination of governance mechanisms

in isolation from each other, without considering their joint effects

(Desender et al., 2016; García-Castro et al., 2013; Oh et al., 2018).

To overcome this shortcoming, a more holistic approach to corpo-

rate governance has been proposed, by considering a configurational

perspective of governance mechanisms. Under this configurational

perspective, substitutive and/or complementary effects between gov-

ernance mechanisms result in the creation of multiple combinations or

“bundles”of such mechanisms (Rediker & Seth, 1995) that work

effectively together toward specific firm outcomes (Aguilera

et al., 2012; Aguilera et al., 2015; Cuomo et al., 2016). According to

Rediker and Seth (1995, p. 87), “firm performance depends on the

efficiency of a bundle of governance mechanisms (authors' italics),”

which implies that different mechanisms can interact with each other

in a complex way to influence organizational outcomes. Essentially, it

is not unreasonable to expect that governance mechanisms will oper-

ate jointly, and therefore, organizational outcomes will be dependent

on the effectiveness of some bundles of governance mechanisms

(Aguilera et al., 2012). Governance practices share a common goal and

collectively constitute the organizational context for the governance

environments, but they do have different characteristics, roles, and

functions. Thus, to understand how organizational outcomes are

affected by multiple governance mechanisms, the attention should be

on their interactive influence and how they might have different

effects depending on how they are combined (Oh et al., 2018).

To date, there has been limited empirical research into this con-

figurational perspective of corporate governance. A growing number

of studies have, however, confirmed the validity of the bundle

approach. For example, Desender et al. (2016) show that, in order to

protect their interests, shareholder-oriented foreign owners introduce

their own practices in the existing bundle of governance mechanisms

normally found in a stakeholder context withing a certain country.

Furthermore, using a panel sample of U.S. firms for 6 years, Oh et al.

(2018) find that multiple governance mechanisms mainly work as sub-

stitutes in influencing corporate social responsibility (CSR) and suggest

that different combinations of governance mechanisms can achieve

similar levels of CSR. Additionally, Florackis et al. (2015) employ a

semi-parametric approach and find that ownership and dividends act

as substitute mechanisms in reducing agency costs of free-cash-flow,

but only in the presence of high debt monitoring. Finally, employing a

fuzzy set/qualitative comparative approach, García-Castro et al.

(2013) reveal that in different national contexts, the bundle of gover-

nance practices in a firm entails relationships that are not necessarily

monotonic and cumulative; they, thus, conclude that there are multi-

ple bundles that can lead to superior organizational performance.

Drawing from this theoretical approach, the main objective of this

study is, consequently, to address the aforementioned gaps both in

the M&A and corporate governance literatures and explore the inter-

relations of certain firm-specific governance mechanisms with respect

to influencing a firm's propensity to undertake corporate acquisitions.

By deploying the “complement versus substitute framework”

(Oh et al., 2018, p. 2717), we apply the concept of marginal effect to

gauge if multiple governance mechanisms operate as complements or

substitutes in the M&A setting, essentially whether they work syner-

gistically or competitively.

Given the multifaceted nature of corporate governance, this

study focusses on four key governance mechanisms, namely board

monitoring, CEO pay incentives, external market discipline, and insti-

tutional investor monitoring. M&A are complex corporate investments

with highly uncertain outcomes and can have major valuation effects

for the acquirer's shareholders. Thus, as acquisition decisions require

board approval, studying the impact of board monitoring characteris-

tics on a firm's acquisition propensity is particularly salient. In addition,

given that the CEO of a firm typically initiates an M&A deal, it is inter-

esting to examine the role of CEO pay incentives in influencing acqui-

sition decisions as these are important determinants in the alignment

of governance mechanisms. Moreover, given the increasing impor-

tance of institutional investor ownership in U.S. public firms (Derrien

et al., 2013), these shareholders have a vested interest in influencing

acquisition decisions and represent another monitoring, yet external

governance mechanism.

Using a sample of U.S. firm acquisitions for the period from

1998 to 2015 and drawing from the literature on the configurational

perspective in corporate governance, we empirically test the Substitu-

tion versus Complementarity Hypotheses in the context of M&A deci-

sions (e.g., Vives, 1990). As mentioned earlier, the substitutive

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