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Exit, Voice, and the Role of Corporate Directors: Evidence from Acquisition Performance

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  • William O. Brown, Jr.

    (Claremont McKenna College)

  • Michael T. Maloney

    (Clemson University)

Abstract

This study examines the characteristics of corporate boards for 82 companies that attempted 106 acquisitions during the 1980s. We find that poor performance is more likely to occur in firms that have recently experienced higher turnover of outside and lower turnover of inside directors. Companies with smaller boards, more reputable members, and larger equity holdings also outperform their counterparts. Our results do not suggest that more outside directors lead to improved performance but that outsiders often resign from the board instead of challenging managerial shirking. We conclude that choosing directors for whom board exit is costly will better reduce agency costs.

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File URL: http://www.claremontmckenna.edu/rdschool/papers/1999-27.pdf
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Bibliographic Info

Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 1999-27.

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Handle: RePEc:clm:clmeco:1999-27

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References

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  1. Baysinger, Barry D & Butler, Henry N, 1985. "Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition," Journal of Law, Economics and Organization, Oxford University Press, vol. 1(1), pages 101-24, Spring.
  2. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
  3. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 375-90, June.
  4. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July.
  5. Hermalin, B.E. & Weisbech, M.S., 1991. "The Effects of Board Composition and Direct Incentives on Firm Performance," Papers 91-02, Rochester, Business - Financial Research and Policy Studies.
  6. Mitchell, Mark L & Lehn, Kenneth, 1990. "Do Bad Bidders Become Good Targets?," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 372-98, April.
  7. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  8. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  9. Klein, April, 1998. "Firm Performance and Board Committee Structure," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 275-303, April.
  10. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
  11. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
  12. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 377-397, September.
  13. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  14. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June.
  15. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-49, June.
  16. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  17. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
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Citations

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Cited by:
  1. Jayati Sarkar & Subrata Sarkar, 2005. "Multiple Board Appointments and Firm Performance in Emerging Economies : Evidence from India," Microeconomics Working Papers 22394, East Asian Bureau of Economic Research.
  2. Harald Hau & Marcel Thum, 2009. "Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany," CESifo Working Paper Series 2640, CESifo Group Munich.
  3. Cashman, George D. & Gillan, Stuart L. & Jun, Chulhee, 2012. "Going overboard? On busy directors and firm value," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3248-3259.
  4. Cornett, Marcia Millon & Fayman, Alex & Marcus, Alan J. & Tehranian, Hassan, 2011. "Dividends, maturity, and acquisitions: Evidence from a sample of bank IPOs," Review of Financial Economics, Elsevier, vol. 20(1), pages 11-21, January.
  5. Rüdiger Fahlenbrach & Angie Low & René M. Stulz, 2010. "The Dark Side of Outside Directors: Do they Quit When They are Most Needed?," Swiss Finance Institute Research Paper Series 10-17, Swiss Finance Institute.
  6. Jiraporn, Pornsit & Davidson III, Wallace N. & DaDalt, Peter & Ning, Yixi, 2009. "Too busy to show up? An analysis of directors' absences," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1159-1171, August.
  7. Wang, Hongxia & Sakr, Sameh & Ning, Yixi & Davidson III, Wallace N., 2010. "Board composition after mergers, does it matter to target shareholders?," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 837-851, December.
  8. Cornett, Marcia Millon & Marcus, Alan J. & Saunders, Anthony & Tehranian, Hassan, 2007. "The impact of institutional ownership on corporate operating performance," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1771-1794, June.
  9. Harford, Jarrad, 2003. "Takeover bids and target directors' incentives: the impact of a bid on directors' wealth and board seats," Journal of Financial Economics, Elsevier, vol. 69(1), pages 51-83, July.
  10. Jiraporn, Pornsit & Singh, Manohar & Lee, Chun I., 2009. "Ineffective corporate governance: Director busyness and board committee memberships," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 819-828, May.
  11. Bauguess, Scott W. & Moeller, Sara B. & Schlingemann, Frederik P. & Zutter, Chad J., 2009. "Ownership structure and target returns," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 48-65, February.
  12. Cornett, Marcia Millon & McNutt, Jamie John & Tehranian, Hassan, 2009. "Corporate governance and earnings management at large U.S. bank holding companies," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 412-430, September.
  13. Ahn, Seoungpil & Jiraporn, Pornsit & Kim, Young Sang, 2010. "Multiple directorships and acquirer returns," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2011-2026, September.
  14. Dewally, Michaël & Peck, Sarah W., 2010. "Upheaval in the boardroom: Outside director public resignations, motivations, and consequences," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 38-52, February.
  15. Jiraporn, Pornsit & Kim, Young Sang & Davidson III, Wallace N., 2008. "Multiple directorships and corporate diversification," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 418-435, June.

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