Internal governance and corporate acquisition activities

Abstract

The literature shows that the performance of bidders has been historically poor both in the short run and in the long run. Agency theory tells us that unless CEO owns 100% of the firm, the decision-making process would deviate from shareholder value maximization. Building upon the theory of internal governance by Acharya et al. (J Financ 66(3):689–720, 2011), this study documents the salutary effect of the novel governance mechanism on corporate acquisition activities. Internal governance is optimal if neither the CEO nor her subordinates are dominating. The curvilinear relationship suggests that when power and responsibility sharing is balanced in acquiring firms, myopic CEOs would have lower acquisition propensity, lower likelihood of targeting public firms, higher deal completion rate, and stronger short term gains. A system of regression equations is applied to mitigate the concerns about potential endogeneity and selection bias. Moreover, the empirical evidence demonstrates that good internal governance has strong predictive power for long term performance in the post-acquisition period, which sheds light on the influential role of subordinates in post-deal integration.