Corporate governance dynamics and wealth effects: evidence from large loss acquisitions and large gain acquisitions in the USA

Abstract

PurposeWhen major reallocations of the firm’s assets are strategically necessary, the corporation’s decision system is perhaps put to its severest test. This paper aims to argue that a relevant balance in the corporate governance structure is highly important to assure those strategic decisions taken are successful and economically beneficial to shareholders’ wealth.Design/methodology/approachThis study examines US firms making major acquisitions resulting in large losses or large gains and identify weaknesses and strengths in their respective governance structures.FindingsFirms making large loss acquisitions demonstrate a balance in the corporate governance structure that heavily favors the CEO. Firms making large gain acquisitions present a more efficient balance in the configuration their corporate governance dynamics. Finally, the authors present evidence that making a major acquisition triggers rebalancing of the corporate governance dynamics to increase the effectiveness of monitoring the implementation of the acquisition. The authors find firms making large loss acquisitions make more extensive changes in the professional expertise on their boards.Originality/valueThis study provides a broad understanding of the role of corporate governance by examining overall governance dynamics and offers how one corporate governance structure does not fit all firms, at all times, in all circumstances. Instead, timely imbalances within the configurations of corporate governance dynamics over the major strategic acquisition process can be consistent with the goal of increasing shareholders’ wealth.