Managerial and Disciplinary Responses to Abandoned Acquisitions in Bidding Firms: A New Perspective

• DOI: http://doi.org/10.1111/corg.12104
• Author: Michael McCann,Robert Ackrill
• Published date: 01 September 2015
• Date: 01 September 2015

Managerial and Disciplinary Responses to

Abandoned Acquisitions in Bidding Firms: A New

Perspective

Michael McCann*and Robert Ackrill

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Existing research suggests that internal and external corporate governance mechanisms substitute

for one another to mitigate agency problems in bidding f‌irms. This paper tests whether the interaction between these mecha-

nisms is more complementary.

Research Findings/Insights: While there is evidence for disciplinaryresponses to bids for unrelated targetsinvolving strategic

retrenchmentand signif‌icant asset divestment,the inf‌luence of the informationconveyed by this characteristicon the likelihood

of post-abandonment discipline is not amplif‌ied when boards are less independent.

Theoretical/Academic Implications: The results suggest thatcertain characteristics areused to distinguish between abandoned

bidders which require disciplineand those that do not. However, our f‌indings do not suggest that interaction between internal

and external governance mechanisms is contingent on board independence. Instead, these interactions between shareholders

and boards seem to be contingent on a range of company, industry, and situation-specif‌ic factors.

Practitioner/Policy Implications: While policy in the UK has focusedon board independence as a meansof effective corporate

governance, our results suggest that this is not a panacea. Effective governance involves active owners, communicating their

interests to boards, and boards responding accordingly. Further encouragementof such communication before, during,and af-

ter acquisitionswill improve signals to managersthat shareholders can targetthe necessary discipline of thosewhom they per-

ceive to need it most.

Keywords: Corporate Governance, Agency Theory, Mergers and Acquisitions, Anglo-American Environments

INTRODUCTION

Merger and acquisition activity represents an important

means of industrial reorganization, ideally delivering

enhanced revenues and/or reduced costs for the f‌irms

involved. However, acquisition decisions can be a manifesta-

tion of agency problems that arise out of the separation of

ownership and control (Berle & Means, 1932; Jensen &

Meckling,1976; Ross, 1973). Acquisitionsare one way through

which entrenched managers pursue their own preferences at

the expense of shareholders, destroying value in the process.

Attempts to prevent such behavior lie at the heart of much

governance reform in the UK and US over the last two

decades.

Agency theory predicts that dispersed ownership (Chen,

Harford, & Li, 2007; Gaspar, Massa, & Matos, 2005), weak

board monitoring (Bhagat & Black, 2002; Tian & Twite, 2011),

and poor incentives (Cornett, Hovekimian, Paulia, & Tehranian,

2003; Goranova, Alessandri, Brandes, & Dharwadkar, 2007)

provide a governance environment enabling value-destroying

bids. However, even when corporate governance mechanisms

are well-designed, value-destroying bids can still be proposed

(O’Sullivan & Wong,2005). In such circumstances, the literature

suggests that the bidding process can substitute effective exter-

nal governance mechanisms for weak internal ones, preventing

proposed “value-reducing”bids by powerful, entrenched

managers pursuing their own agenda, from progressing (Lehn

& Zhao, 2006; Paul, 2007). Indeed, according to data from the

Takeover Panel, the organization which regulates acquisitions

in the UK, between 2000 and 2010, on average 10 percent of bids

were abandoned annually at an advanced stage.

Paul (2007: 774) arguesthat abandonment itself is the f‌inale

of the disciplinary process, stating that “corrective responses

are unnecessary for terminated bids.”However, is abandon-

ment the disciplinary f‌inale? Several studies f‌ind ambiguous

evidence surrounding discipline in bidders after abandoned

bids (see Holl & Pickering, 1988 and Taff‌ler & Holl, 1991).

However, this work is dated and focuses on narrow f‌inancial

measures of performance after abandonment. The present

*Address for correspondence: Michael McCann, Nottingham Business School,

Nottingham,Trent University, NottinghamNG1 4BU, UK. Tel:+44(0)115 8482451;

E-mail:michael.mccann@ntu.ac.uk

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12104

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Corporate Governance: An International Review, 2015, 23(5): 402–416