Corporate Governance and Takeover Outcomes

Abstract

Manuscript type: ReviewResearch Question/Issue: This article reviews how and through which channels corporate governance shapes takeover outcomes.Research Findings: We summarize the main findings of the empirical literature that investigates the effect of corporate governance mechanisms on takeover outcomes. The internal and external governance mechanisms that we consider are: the board of directors, the takeover market, blockholders, financial markets in general, product market competition, and the labor market. Theoretical/Academic Implications: This article adopts an agency perspective of the firm and reviews the mergers and acquisitions (M&A) literature through the lens of corporate governance. We highlight how the different corporate governance mechanisms affect the takeover process and outcomes. Practitioner/Policy Implications: The article systematizes the current state of the research linking corporate governance and takeovers. In doing so, we emphasize which mechanisms policymakers can use to improve the efficiency of the takeover market. Alternatively, the review also offers indications concerning mechanisms that could be used to mitigate agency conflicts and, as such, increase firm value.

Boards that Make a Difference in Firm’s Acquisitions: The Role of Interlocks and Former Politicians in Spain

“…Despite an increasing uncertainty and a substantial decrease in takeover activity during the financial crisis, acquisitions reached new heights all over the world by the year 2014 [22]. Resource Dependency Theory suggests that firms are dependent on external organizations, and this dependency creates risk and uncertainty [7].…”

“…Decisions on acquisitions are quite often associated with industry-level shocks [43,44] that involve environmental uncertainty. Despite this uncertainty and a substantial decrease in takeover activity during the financial crisis, acquisitions have reached new heights all over the world [22]. This fact has caused a shift of focus in the literature [45], now oriented towards the study of how the characteristics of the board, such as board independence [41,46,47], board size [48], board meetings, or board ownership, affect the propensity to acquire other firms [49].…”

“…Despite their recent growth, acquisitions are associated with a variety of risks and pitfalls that result in considerable uncertainty about the acquisition decision. This uncertainty comes from different sources, such as the difficulties of organizations to obtain information about the identification and competencies of their actual targets [22,56]. For example, if a bidding firm has a better understanding of the potential target firm's capabilities, potential post-acquisition economies of certain scope or scale, or possible related synergies, they will be able to evaluate the potential acquisition better and more efficiently by reducing information asymmetries [57,58].…”

“…This database also included information about board members. Boards of directors are one of the many resources firms have, and they serve two important functions within a firm: monitoring and advising [22,86,87]. Following Daily et al [88] (p. 371), "we define governance as the determination of the broad uses to which organizational resources will be deployed and the resolution of conflicts among the myriad participants in organizations".…”

“…This increases the likelihood of acquisition by the company. Although previous literature has analysed the effect of board ties to other firm behaviours or performances on acquisition, the main object of study has been the financial outcomes of acquisitions [19][20][21][22]. We also explore whether having former politicians on the board has an impact on this relationship.…”