Managerial and Disciplinary Responses to Abandoned Acquisitions in Bidding Firms: A New Perspective

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueExisting research suggests that internal and external corporate governance mechanisms substitute for one another to mitigate agency problems in bidding firms. This paper tests whether the interaction between these mechanisms is more complementary.Research Findings/InsightsWhile there is evidence for disciplinary responses to bids for unrelated targets involving strategic retrenchment and significant asset divestment, the influence of the information conveyed by this characteristic on the likelihood of post‐abandonment discipline is not amplified when boards are less independent.Theoretical/Academic ImplicationsThe results suggest that certain characteristics are used to distinguish between abandoned bidders which require discipline and those that do not. However, our findings do not suggest that interaction between internal and external governance mechanisms is contingent on board independence. Instead, these interactions between shareholders and boards seem to be contingent on a range of company, industry, and situation‐specific factors.Practitioner/Policy ImplicationsWhile policy in the UK has focused on board independence as a means of effective corporate governance, our results suggest that this is not a panacea. Effective governance involves active owners, communicating their interests to boards, and boards responding accordingly. Further encouragement of such communication before, during, and after acquisitions will improve signals to managers that shareholders can target the necessary discipline of those whom they perceive to need it most.