Corporate Governance Structure and Mergers

Abstract

Few transactions have the potential to generate revelations about the market value of corporate assets and liabilities as mergers and acquisitions (M&A). Corporate governance and control mechanisms such as independent directors, independent blockholders, and managerial share ownership are usually important predictors of the size and distribution of the incremental wealth generated by M&A transactions. We add to this literature by investigating these relationships using a sample of banking organization M&A transactions over the period 1990-2004. Unlike research on nonfinancial firms, the impact of independent directors, share ownership of the top five managers, and independent block holders on bank merger purchase premiums in this environment is likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target banks, the deal characteristics, and the economic environment. Our results are robust. They support the hypothesis that independent directors may provide an important internal governance mechanism for protecting shareholders’ interests, especially in large-scale transactions such as mergers and takeovers. We also find the results to be consistent with the hypothesis that independent blockholders play an important role in the market for corporate control as does managerial share ownership. But these effects dampen the impact of independent directors on target shareholders’ merger prices. Our overall findings would support policies that promote independent outside directors on the board of banking firms in order to provide protection for shareholders and investors at large.