Acquisition Premium and Target Board Interlocks

Abstract

This study uncovers the board interlocks as a basis of target bargaining power in takeover negotiations and as an important determinant of acquisition premium. In the imperfect market characterized by information asymmetry, a target firm can leverage its relational resources to overcome information barriers. We posit that a target firm can disseminate information via its board interlocks, attracting well-matched, multiple bidders and thus enhancing its seller’s bargaining strength. However, the premium-generating role of board interlock ties is contingent on the importance of leveraging information through target board. Specifically, high-tech target firms tend to amplify the effectiveness of the target interlocks, whereas high-status acquirers are likely to diminish the effect. Hypotheses are tested with a sample of 1024 acquisitions among publicly-listed firms in the United States from 2000 to 2010. Our framework departs from the dominant emphasis on the acquirer-side sources of acquisition premium and ...