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Protective governance choices and the value of acquisition activity

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  • Bauguess, Scott
  • Stegemoller, Mike

Abstract

Protective governance structure is often viewed as costly to minority shareholders who bear the costs of opportunism by entrenched managers. A less common view is that protective governance encourages value-enhancing initiative, allowing risk-averse managers to pursue projects they would otherwise forgo. To assess these views we examine the acquisition decisions of S&P 500 firms between 1994 and 2005 and document two entrenching dimensions of governance: founding family presence and larger boards with more inside directors. We find that family firms destroy value when they acquire, consistent with an agency cost explanation for acquisitions. In contrast, firms with large boards and more insiders are more likely to acquire and to create value when they do acquire. These results are consistent with benefits to managerial initiative when managers are insulated from discipline. Finally, we find no systematic evidence that shareholder right limiting provisions either facilitate managerial entrenchment or lead to wealth losses through acquisition activity.

Suggested Citation

  • Bauguess, Scott & Stegemoller, Mike, 2008. "Protective governance choices and the value of acquisition activity," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 550-566, December.
  • Handle: RePEc:eee:corfin:v:14:y:2008:i:5:p:550-566
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    References listed on IDEAS

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    Cited by:

    1. Caprio, Lorenzo & Croci, Ettore & Del Giudice, Alfonso, 2011. "Ownership structure, family control, and acquisition decisions," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1636-1657.
    2. Ettore Crocia & John A. Doukas & Halit Gonenc, 2010. "Family Control and Financing Decisions," Koç University-TUSIAD Economic Research Forum Working Papers 1004, Koc University-TUSIAD Economic Research Forum.
    3. De Cesari, Amedeo & Gonenc, Halit & Ozkan, Neslihan, 2016. "The effects of corporate acquisitions on CEO compensation and CEO turnover of family firms," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 294-317.
    4. Chikh, Sabrina & Filbien, Jean-Yves, 2011. "Acquisitions and CEO power: Evidence from French networks," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1221-1236.
    5. repec:spr:fininn:v:1:y:2015:i:1:d:10.1186_s40854-015-0013-6 is not listed on IDEAS
    6. Adhikari, Hari P. & Sutton, Ninon K., 2016. "All in the family: The effect of family ownership on acquisition performance," Journal of Economics and Business, Elsevier, vol. 88(C), pages 65-78.
    7. Croci, Ettore & Petmezas, Dimitris, 2015. "Do risk-taking incentives induce CEOs to invest? Evidence from acquisitions," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 1-23.
    8. Bouzgarrou, Houssam & Navatte, Patrick, 2013. "Ownership structure and acquirers performance: Family vs. non-family firms," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 123-134.
    9. Andrey Golubov & Dimitris Petmezas & Nickolaos G. Travlos, 2013. "Empirical mergers and acquisitions research: a review of methods, evidence and managerial implications," Chapters,in: Handbook of Research Methods and Applications in Empirical Finance, chapter 12, pages 287-313 Edward Elgar Publishing.
    10. Serfling, Matthew A., 2014. "CEO age and the riskiness of corporate policies," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 251-273.
    11. repec:taf:applec:v:48:y:2016:i:42:p:4051-4065 is not listed on IDEAS
    12. Etienne Redor, 2016. "Board attributes and shareholder wealth in mergers and acquisitions: a survey of the literature," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(4), pages 789-821, December.
    13. Humphery-Jenner, Mark L. & Powell, Ronan G., 2011. "Firm size, takeover profitability, and the effectiveness of the market for corporate control: Does the absence of anti-takeover provisions make a difference?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 418-437, June.

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