The effect of corporate governance mechanisms on European Mergers and Acquisitions

• DOI: https://doi.org/10.1108/CG-05-2018-0166
• Pages: 965-986
• Date: 08 October 2018
• Published date: 08 October 2018
• Author: Ioannis Tampakoudis,Michail Nerantzidis,Demetres Soubeniotis,Apostolos Soutsas
• Subject Matter: Corporate governance,Strategy

The effect of corporate governance

mechanisms on European Mergers

and Acquisitions

Ioannis Tampakoudis, Michail Nerantzidis, Demetres Soubeniotis and Apostolos Soutsas

Abstract

Purpose –The purpose of this study is twofold: First, to assess the economic impact of Mergers and

Acquisitions (M&As) onEuropean acquiring firms from the beginning of thesixth merger wave onward.

And second, to investigate the effect of CG mechanisms such as board size, voting rights and anti-

takeoverprovisions (ATPs) on acquirers’ gains,along with a set of control variables.

Design/methodology/approach –For the purpose of the study, the authors use a sample of 349

completed M&As across all business sectors between European firms from 01/01/2003 to 31/12/2017.

Abnormal returns are estimated by applying an event study methodology, and the effects of CG

mechanismsare assessed with univariate and multivariatecross-sectional regressions.

Findings –The authors present evidencethat acquirers realize significant positiveexcess returns upon

the announcement of M&As.The authors find past profitability to be a strong indicator of value creation,

while most of the traditional firm-specific and deal variables fail to interpret the results. The authors’

analysis indicates that the examined CG measures have a significant effect on acquirer’s gains. More

specifically, the authors find that boards in excess of eight directors are negatively related to

announcement-periodabnormal returns. In contrast, the wealth effectsfor acquiring firms are positively

related to shareholders’voting rights and/or to the number of ATPs. The estimatedcoefficients of all three

CG mechanismsare statistically significant across alternativemodel specifications.

Research limitations/implications –A clear implicationis that the existence of certain CG mechanisms

leads to value-enhancing strategic decisions for European acquirers. In terms of policy direction, the

authors’ findings assist practitioners and/or national and transnational institutions in perceiving the

efficacyof certain CG practices.

Practical implications –This study indicates that CorporateGovernance Statements (CGSs) fail to provide

adequate information to investors to understand in-depth the CG mechanisms that co mpanies apply. Thus,

the authors recommend that CGSs should provide not only narrative information but also information that

may generate value for shareholders and other stakeholders as well. Such information sh ould be qualitative

and/or quantitativein nature and be made available to market participants to support their decision-making.

Originality/value –To the authors knowledge,this is the first study that investigates the effectof CG on

the economic impact of M&As for European acquirers, using three widely examined CG mechanisms,

namely, the boardsize, the voting rights and the ATPs. The authors’empirical findings form the basis for

further examination of the linkage between M&As and CG, with the intention of establishing the

appropriate CG framework that will ensure shareholder wealth creation. This line of research could

produce new insights in the field, allowing investors and policymakers to appreciate the benefits of

effectiveCG.

Keywords Europe, Corporate governance, Event study, Acquirer abnormal returns,

Mergers and acquisitions

Paper type Research paper

1. Introduction

The main drivers that force firms to engage in Mergers and Acquisitions (M&As) are the

creation of synergies, the assimilation of new competencies and the diversification of

Ioannis Tampakoudis is

Assistant Professor at

University of Macedonia,

Thessaloniki, Greece.

Michail Nerantzidis is

based at Hellenic Open

University, Greece.

Demetres Soubeniotis is

Professor and Apostolos

Soutsas is PhD Candidate,

both at University of

Macedonia, Thessaloniki,

Greece.

Received 3 May 2018

Revised 31 May 2018

Accepted 11 June 2018

DOI 10.1108/CG-05-2018-0166 VOL. 18 NO. 5 2018, pp. 965-986, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 965

business risk, which in turn strengthen corporate growth and enhance corporate profitability

(Alexandridis et al.,2010). This illustrates that M&As may act as an efficient way for firms to

expand into new markets and increase the wealth of their shareholders (Papadakis, 2005).

In that context, during the past decades academic and market research has extensively

studied the wealth effects deriving from the activity of M&As (Alexandridis et al.,2010;

Alexandridis et al., 2017;Masulis et al., 2007). One of the main findings of the literature is

that M&As often enough fail to generate value for the shareholders of acquiring firms. Thus,

one of the purposes of this study is to examine the economic impact of M&As on European

acquirers.

Considering that in practice managers do not always take value-enhancing strategic

decisions (Masulis et al.,2007), a growing body of research focuses on CG mechanisms as

a means for effective decision-making in terms of shareholder value creation (Alexandridis

et al.,2010

;Bebchuk and Cohen, 2005;Bebchuk et al.,2009;Cremers and Nair, 2005;

Gompers et al.,2003;Masulis et al.,2007). For this reason, the second purposeof our study

is to investigate the effect of CG mechanisms on acquirers’ gains. In particular, there is a

considerable number of corporate mechanisms –both internal and external –that induce

the self-interested controllers of a company to make decisions that generate value for

shareholders (Denis and McConnell, 2003). Nevertheless, the literature does not reach a

consensus regarding the most appropriate CG mechanisms. Based on prior studies and

intending to capture the main aspects of CG, we consider the board size, the shareholder

voting rights and the ATPs.

Taking into account all the above, our study offers important contributions to the literature.

First, we provide evidence that acquirers realize significant positive excess returns in short

event windows around the announcement date. Our results are in contrast with Mateev and

Andonov (2016) who focus on an overlapping sample period (2003-2010) as well as with

Campa and Hernando (2004) and Martynova and Renneboog (2006,2011) who examine

European M&As before 2001. Second, we find board size, voting rights and ATPs to be

significant variables of value creation for European acquirers. In particular, boards with

more than 8 directors have a significant negative effect on the abnormal returns for

acquiring firms, suggestingthat larger boards are more ineffective than smaller onesdue to

inefficient coordination and communication. (Al-Bassam et al.,2015;Jensen, 1993;

Nerantzidis and Tsamis, 2017;Samaha et al.,2012). Similar conclusions can be drawn for

the other two examined measures, namely, voting rights and corporate control (in the form

of ATPs). Our results suggest that higher voting rights generate higher gains for acquirers,

as increased shareholder voting rights allowshareholders to monitor the decision-making of

managers more closely and to have a decisive role in major corporate decisions (Gompers

et al., 2003). As far as ATPs are concerned, empirical evidence shows that firms with

increased numbers of anti-takeover measures generate higher excess returns to their

shareholders. This finding contradicts Masulis et al. (2007) who find a negative correlation

between ATPs and announcement-period abnormal returns for the US firms and Bauguess

and Stegemoller (2008) who find no systematic relation between G index and bidder

returns. This may be attributableto the more active role of the market for corporate control in

the USA –contrary to Europe –and the differences in CG framework (Bauer et al., 2004;

Sergakis, 2015) and legal systems (La Porta et al., 2002). All in all, the discussion of the

above issues highlights the need for more empirical consideration of the effect of CG

mechanisms that may have an influence on M&A valuecreation. This type of research could

assist market participants and scholars to better understand how and through which

channels CG shapes a major strategic decision,namely, M&As (Aktas et al.,2016).

The rest of this paper is organized as follows: Section 2 reviews the related literature and

addresses the challenges and opportunities in CGSs. Section 3 describes the data and

presents the methodology used in our analysis. Section 4 presents the empirical findings

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