Wednesday, October 26, 2005

SSRN-Corporate Governance and Acquirer Returns by Ronald Masulis, Cong Wang, Fei Xie

SSRN-Corporate Governance and Acquirer Returns by Ronald Masulis, Cong Wang, Fei Xie:

Some takeovers are good (value enhancing), others are bad (value destroying). Why the difference? One easy explanation is that managers often have incentives (such as empire building, hubris, pay tied to size, ego, diversification) to do a merger that is not in shareholders’ best interests. Masulis, Wang, and Xie examine this by looking at the returns to acquiring firms and relating these returns to the corporate governance in place at the firm.

To some degree the market for corporate control and corporate governance at the firm itself can force managers to look out for shareholders. Thus firms with anti-takeover provisions (ATP) in place make good candidates for areas where managers might be more tempted to do acquisitions that increase managerial well-being at the expense of shareholders.

Examining over 3000 acquisitions from 1990 to 2003, Masulis, Wang, and Xie find strong support for this hypothesis. In their words:

“More specifically, acquisition announcements made by firms with more ATPs in place generate lower abnormal bidder returns than those made by firms with fewer ATPs, and the difference is significant both statistically and economically. This result holds for all the corporate governance indices or subsets of ATPs we consider and it is robust to controlling for an array of other key corporate governance mechanisms, including product market competition, CEO equity incentives, institutional ownership, and board characteristics."

Simply put, this is more evidence that not only are antitakeover provisions bad for shareholders, but it shows a specific path by which these diminish shareholder wealth.

Not centent with just one important finding, the authors also look at other control or governance mechanisms on the premise that if ATPs lower returns, good governance measures will increase acquiring firms' returns. They also find support for this hypothesis:

"acquiring firms operating in more competitive industries experience higher abnormal announcement returns, as do acquirers that separate the positions of CEO and chairman of the board."

An I^3 paper! It definitely deserves a WOW!


Masulis, Ronald W., Wang, Cong and Xie, Fei, "Corporate Governance and Acquirer Returns" (August 22, 2005). AFA 2006 Boston Meetings Paper

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