Institutional complementarities and corporate governance: The case of hostile takeover attempts

• Author: Mauro F. Guillén,Nan Zhou
• DOI: http://doi.org/10.1111/corg.12263
• Published date: 01 March 2019
• Date: 01 March 2019

ORIGINAL ARTICLE

Institutional complementarities and corporate governance:

The case of hostile takeover attempts

Nan Zhou

1

|Mauro F. Guillén

2

1

Management Department, Nankai Business

School, Nankai University, Tianjin, China

2

Wharton School, University of Pennsylvania,

Philadelphia, Pennsylvania, USA

Correspondence

Nan Zhou, Associate Professor, Management

Department, Nankai Business School, Nankai

University, Tianjin, China 300071.

Email: zhounan38@hotmail.com

Funding information

Nankai University, Grant/Award Number: 100

Youth Academic Leaders Plan; Tianjin Associ-

ation of Social Science's 1,000 Scholar Onsite

Investigation Program, Grant/Award Number:

181303

Abstract

Research Question/Issue: Do institutions reinforce each other when it comes to

shaping the economic and organizational environment? We investigate national insti-

tutional complementarities by examining how different types of institutions jointly

influence the occurrence of hostile takeover attempts, a practice in corporate gover-

nance whose frequency differs across countries. We distinguish among regulative,

normative, and cultural‐cognitive institutions and examine how they interact to influ-

ence the occurrence of hostile takeover attempts worldwide.

Research Findings/Insights: Using panel data on hostile takeover activity of 45

countries between 1988 and 2016, we find evidence supporting the impact of institu-

tions individually and of institutional complementarities.

Theoretical/Academic Implications: This study shows that important corporate

governance practices such as hostile takeover attempts are indeed influenced by dif-

ferent aspects of institutional environment. It thus helps us better understand the

effectiveness of corporate governance practice across different countries.

Practitioner/Policy Implications: This study sheds new light on policies facilitating

certain corporate governance practice such as hostile takeovers. It also provides man-

agers with a tool to analyze the prevalence of hostile takeovers in a country.

KEYWORDS

corporate governance, institutional complementarities,hostile takeover attempts

1|INTRODUCTION

Scholars of corporate governance have long recognized that the prev-

alence of corporate governance practices across different countries is

influenced by multiple and functionally related institutions (Aguilera &

Jackson, 2010). Although there are considerable variations in institu-

tional arrangements, they tend to drive corporate governance prac-

tices to become more similar within countries and to differ across

countries. Most scholars interested in cross‐national comparative cor-

porate governance research agree that institutions matter to explain

the diversity of corporate governance (Aguilera, Desender, & de Cas-

tro, 2012; Capron & Guillen, 2009; Fiss, Kennedy, & Davis, 2012).

However, how they matter still remains a contested question. Existing

studies usually compare institutions in terms of highly aggregated

measures (Aguilera & Jackson, 2010). In this paper, we theorize and

test institutional complementarity as it affects corporate governance

practices worldwide.

Institutional complementarity refers to the interdependence

among institutions, that is, different institutions within a country

working synergistically to bolster each other's effectiveness and legit-

imacy. The notion of institutional complementarity has been explored

in the cross‐national context by looking at the interaction between

strategic and market considerations (Kim & Finkelstein, 2009) and at

resource complementarity (Chung, Singh, & Lee, 2000). Efforts to

examine how institutional complementarity influences the worldwide

spread of corporate governance have been limited.

Received: 27 December 2017 Revised: 24 October 2018 Accepted: 2 November 2018

DOI: 10.1111/corg.12263

82 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:82–97.wileyonlinelibrary.com/journal/corg

In this paper, we argue that national institutions are complemen-

tary to one another building on the influential three‐pillar approach.

“Institutions consist of regulative, normative, and cultural‐cognitive

elements that, together with associated activities and resources, pro-

vide stability and meaning to social life”(Scott, 2008, p. 61). Although

we will hypothesize that the three institutional pillars are complemen-

tary, our empirical approach is open to both competing and comple-

mentary institutional effects, as Scott (2008) suggested. Previous

empirical research has tested the separate effects of the three institu-

tional pillars for specific phenomena, such as the choice between joint

venture and wholly owned subsidiary in foreign expansion (Yiu &

Makino, 2002), and the technological heterogeneity of entrepreneurial

foundings (Sine, Haveman, & Tolbert, 2005), but without examining

the interactions among them.

We propose to conceptualize the institutional setting prevalent in

a given country in terms of different interacting dimensions or institu-

tions, as suggested by the configurational approach (Aguilera et al.,

2012; Fiss, 2007). Central to this perspective is the idea that different

configurational elements or institutions do not necessarily compete to

explain variation in outcomes but rather come together to produce

those outcomes through the agency of actors embedded in different

layers of institutional meaning (Thornton, Ocasio, & Lounsbury, 2012).

We explore institutional complementarities in the context of the

phenomenon of hostile takeover attempts, a topic that has been used

by scholars to study the cross‐national diversity of corporate gover-

nance (Hasani Mohd & Liu, 2014; Schneper & Guillén, 2004). A hostile

takeover is an acquisition resisted by the target firm's shareholders or

management team. It is an interesting practice because it is highly

contested: Some organizational stakeholders view it as beneficial to

their interests whereas others see it as inimical to them (Hirsch,

1986; Schneper & Guillén, 2004). Although most existing studies on

hostile takeovers adopt an economic view, examining the interactions

among different institutions offers a more complete picture of how

institutions complement each other to influence hostile takeover

attempts (Judge, Douglas, & Kutan, 2008). We test these predictions

with a sample of hostile takeover attempts launched by firms in 45

countries from 1988 to 2016.

The phenomenon of hostile takeovers is an appropriate empirical

setting in which to examine institutional complementarities, for three

reasons. First, hostile takeovers are a controversial practice in need

for legitimacy and justification (Fiss et al., 2012; Hirsch, 1986). In

fact, since its inception, hostile takeovers have generated consider-

able debates over whether it is beneficial to stakeholders such as

shareholders and employees (Mohlmann, 2012). Second, as we

described earlier, there are conflicting empirical results regarding dif-

ferent aspects of hostile takeovers, such as the selection of takeover

targets and the impact of hostile takeovers on innovation (Franks &

Mayer, 1996; Rhee & Fiss, 2014). Thus, it becomes more likely that

multiple institutions complement each other to reduce uncertainty.

Third, hostile takeovers are a corporate governance practice and thus

part of the corporate governance system of a country. The literature

emphasizes that corporate governance systems are resilient to

change precisely because its components are closely related and

embedded in a broader institutional environment (Aguilera &

Cuervo‐Cazurra, 2004; Aoki, 2001).

2|RESEARCH BACKGROUND

2.1 |Hostile takeovers as a corporate governance

practice

Since the 1980s, there has been a surge in hostile takeovers, albeit

with some sharp ups and downs. Table 1 lists the name of countries,

the number of hostile takeover attempts, and the number of com-

pleted hostile takeovers in 45 countries. The United States and the

United Kingdom are the main markets where hostile takeovers take

place (Martynova & Renneboog, 2008). From 1988 to 2016, there

were 4,487 hostile takeover attempts in the United States and 1,934

in the United Kingdom. Starting in the mid‐1990s, an increasing num-

ber of hostile takeover attempts took place in continental Europe. The

numbers, however, are smaller than those in the United States and the

United Kingdom. For instance, in France, 698 hostile takeover

attempts occurred between 1988 and 2016, most of them during

the 1990s. In Japan, the number is 207, and most of them took place

after the year 2000.

Most studies on hostile takeover activity adopt an economic view,

explaining it as a competition for corporate control to maximize firm

value by increasing corporate governance efficiency (Morck, Shleifer,

& Vishny, 1989). Hostile takeovers take place when control rights

and ownership are separated from each other in publicly listed compa-

nies. According to agency theory, managers may have different inter-

ests from shareholders (Jensen & Meckling, 1976). Thus, there is a

need for shareholders to effectively monitor managers' use of

resources. When internal mechanisms such as monitoring and com-

pensation plans fail to align interests, a course of last resort may be

found in an external mechanism, that is, the hostile takeover.

Hostile takeovers are usually predicated on the assumption that

the incumbent management team is not maximizing shareholder

wealth. A company that operates at suboptimal levels has a potential

upside in profitability and share price, turning it into an ideal target

for outside investors. Acquiring such firms and replacing the incum-

bent management could increase firm efficiency and thus create value

for the acquiring firm and for all shareholders (Mohlmann, 2012). In

this sense, hostile takeovers are a useful tool to discipline

underperforming management, given that the threat of a takeover

may be enough to put pressure on the incumbent managers (Morck

et al., 1989).

Agency theory cannot fully explain cross‐national variations in

hostile takeovers because it overlooks the diverse identities of stake-

holders, the interdependencies among stakeholders other than man-

agers and employees, and the institutional environment (Aguilera &

Jackson, 2003). Accordingly, this approach appears not to be able to

explain hostile takeover activity satisfactorily. For example, although

it suggests that poorly performing firms are the potential target of

hostile takeovers, studies have found that target firms tend to be aver-

age performers in comparison with other companies (Franks & Mayer,

1996). Another example has to do with the impact of hostile takeovers

on innovation. Although economic theories predict that hostile take-

overs discipline managers and make them focus more on the most

innovative and valuable projects (Jensen, 1988; Seru, 2014), scholars

have found that hostile takeovers might actually stifle innovation

ZHOU ET AL.83