The impact of board independency, CEO duality and CEO fixed compensation on M&A performance

• DOI: https://doi.org/10.1108/CG-03-2017-0047
• Date: 02 October 2017
• Published date: 02 October 2017
• Pages: 947-971
• Author: Emanuele Teti,Alberto Dell’Acqua,Leonardo Etro,Michele Volpe
• Subject Matter: Strategy,Corporate governance

The impact of board independency, CEO

duality and CEO fixed compensation on

M&A performance

Emanuele Teti, Alberto Dell’Acqua, Leonardo Etro and Michele Volpe

Emanuele Teti is based

at Bocconi University,

Milan, Italy.

Alberto Dell’Acqua is

Master in Corporate

Finance Director at

Bocconi University, Milan,

Italy. Leonardo Etro and

Michele Volpe are both

based at Bocconi

University, Milan, Italy.

Abstract

Purpose –This study aims to examine whether particular corporate governance mechanisms influence

the performance of mergers and acquisitions.

Design/methodology/approach –Regression analyses investigating 1,596 recent acquisitions in the

US market completed over the five-year period from 2009 to 2013 are performed.

Findings –The results show that board independency, CEO duality and level of CEO fixed

compensation have an impact on the return of acquisitions. Moreover, the findings indicate that

acquisitions significantly create value for bidders delivering a positive cumulative abnormal return upon

announcement. Finally, also focusing on the 690 relative larger deals, there is a clear evidence of a

positive influence of good corporate governance mechanisms over the quality of acquisitions

completed.

Originality/value –To our knowledge, this is the first paper trying to identify corporate governance

mechanisms related to the best acquisition decisions, by using specifically the three corporate

governance variables (CEO duality, CEO fixed compensation and board independency).

Keywords Corporate governance, Board of directors, Remuneration, Chief executives,

Boardroom performance, Acquisitions and mergers

Paper type Research paper

1. Introduction

During periods of intense M&A activity – so-called merger waves – as that from 2013 up to

2015, with transactions passed from US$0.6 to almost US$1.5tn, the debate on value

created by mergers and acquisitions (M&As) has regained its centrality. Several studies

focus on the research question of whether the implementation of M&As creates value for the

bidders’ shareholders, often reaching different and conflicting conclusions. Franks et al.

(1991) find evidence of significant post-merger returns for the acquirer; in contrast, Moeller

et al. (2005) reach the opposite conclusion documenting what they call “a wealth

destruction on a massive scale”. The purpose of this study is to understand the conditions

under which the best deals are implemented, focusing in particular on corporate

governance mechanisms. Given the conditions actually in place in the current market, this

study contributes to the identification of control mechanisms that firms implement to avoid

that their CEOs conclude value-destroying deals. In addition, this study can also be

beneficial to all those investment funds – typically hedge funds – that follow event-driven

strategies and try to predict market reactions to deal announcements. Indeed, our results

may help to spot corporate governance characteristics of those firms that are more likely to

perform deals appreciated by the market. Calculating the performance of 1,596 US deals

using cumulative abnormal returns upon announcement, this paper identifies the control

mechanisms, among those typically tested in the corporate governance literature, that are

Received 6 March 2017

Revised 9 June 2017

Accepted 21 June 2017

DOI 10.1108/CG-03-2017-0047 VOL. 17 NO. 5 2017, pp. 947-971, © Emerald Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 947

associated with higher M&A returns. Looking at the previous literature, only Masulis et al.

(2007) completed a similar analysis focusing in particular on anti-takeover provisions and

reporting a negative correlation between M&A performance and CEO duality. The following

analysis reports interesting results not only on CEO duality, but also on CEO’s

compensation structure. In addition, particularly when focusing on the 690 relatively larger

deals, board independency is found to have a significant impact on M&A performance.

The remainder of the paper is structured as follows. In Section 2, the literature review on the

matter is presented. Section 3 introduces the hypotheses and research question, while

following Sections 4 and 5 introduce, respectively, the methodology and data of the paper.

Section 6 presents the results and discusses them. A final section concludes the work.

2. Literature review

In this section, an overview of previous findings related to both M&A and corporate

governance is illustrated. The literature review is organized in the following sub-sections:

studies investigating value created by M&As;

literature on the impact of corporate governance on M&As value creation;

M&As theoretical framework relating management behavior and M&As; and

managerial entrenchment and empirical findings on the possible relation between

corporate governance mechanisms and M&As performance.

2.1 The performance of M&As

With the term mergers and acquisitions (M&As), we refer to a series of transactions that

have in common the aim to create value through the execution of activities that change

permanently the corporate and organizational structure of the company (Gaughan, 2010;

Miller, 2008). The literature debate on value created by M&As presents mixed findings.

While most studies seem to agree that acquisitions create value for the target’s

shareholders (Bradley et al., 1987), conflicting results are reported when it comes to value

created for the bidders’ shareholders. Early studies, such as Jensen and Ruback (1983),

suggest that targets’ shareholders gain from mergers and that acquirers’ shareholders do

not lose if the bid is successful, achieving an average abnormal stock return approximately

equal to zero. Franks et al. (1988) analyze a sample of acquisitions taking place in the UK

and USA in the years 1955-1985 and find negative post-merger returns for bidders,

especially when the acquisition is paid in cash. However, Franks et al. (1991) conclude that

post-merger returns are significantly positive for the acquirer and that, the previous studies

are biased by benchmark errors in evaluating the stock performance. More recent studies

seem not to agree on the positive value created for the bidder’s shareholders. Andrade

et al. (2001) find a slightly negative, but not statistically significant, stock reaction to merger

announcements, suggesting no value creation for the bidder, while Andriosopoulos et al.

(2015) find that so-called value acquirers outperform glamour acquirers during and after

the M&A announcement. Their findings also show that, when the bidder pays in, equity

earns lower returns compared to cash acquisitions. Similar results are found by Eckbo

(2010), who shows that when the target is a listed company, the return for the bidder

shareholders is lower compared to the return of deals having a private target. In addition,

there is also significant difference in premiums paid by public bidders and private ones.

Indeed, Eckbo (2010) argues that public acquirers are willing to pay higher premiums

compared to private acquirers, suggesting the existence of agency problem in the M&A

policy pursued by public companies. Moeller et al. (2005) show the difficulty in defining

whether engaging in M&As creates value in absolute terms or not, as even though some

transactions add value to the shareholders, large loss deals tend to influence overall

results. Moeller et al. (2005) also investigate the characteristics distinguishing large loss

deals. They find that they are: usually settled in equity rather than cash, consistently with

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