Effectiveness of Bidders Internal Governance Structure

Kevin I. Okoeguale

This paper reexamines the link between internal governance structure (board structure) and acquirer/bidder performance, controlling for the disciplinary role of the market for corporate control based on the level of antitakeover provisions (ATPs), using a data sample of mergers and acquisitions from the 2000s, a period that witnessed significant board structure reform – the introduction of minimum board independence requirements to the NYSE and NASDAQ listing rules following the enactment of the Sarbanes-Oxley Act of 2002. In general, based on the full data sample, the evidence presented in this paper fails to refute the view that firms choose their internal governance structure (board structure) in a value-maximizing way; the mandated changes to board structure, in the 2000s, may have done little to improve the effectiveness of bidders’ internal governance structure. On average, bidders' anti-takeover provisions show no significant effect on the returns to bidders, and fail to significantly affect the lack of any significant relationship between board structure – board size and board independence – and the returns to bidders. However, for the subsample comprising bidders with high levels of anti-takeover provisions, board independence is found to be negatively related to the returns to bidders with high levels of ATPs. One interpretation of this finding is that the effectiveness – benefits relative to the costs – of independent boards diminishes at high levels of anti-takeover provisions. For the sub-sample comprising bidders without classified boards, board size is positively related to the returns to bidders, indicating that the benefits to increasing board size appears to outweigh the costs for bidders without a classified board structure.

DOI : https://doi.org/10.21102/gefj.2017.09.102.01