Date of Degree
Gayle L. DeLong
One method of evaluating the success of management decisions regarding acquisitions is to examine equity price movements as the news of the merger is made public. The price movement of the acquiring firm's equity around the announcement of the acquisition indicates if shareholders believe management has acted in their interest. In the banking industry, researchers have found that on average equity values of the acquiring bank do not display abnormal positive returns upon announcement, and often display statistically significant negative returns. Another line of research has documented that CEOs are better compensated for managing larger organizations, particularly when involved in merger activity. This study investigates the possibility of a linkage between weak firm-level corporate governance structures at banks and their propensity to make acquisitions that produce negative reactions from equity holders. A commercially-sold governance index from Institutional Shareholder Services is used to measure governance strength. Acquisition events are from the comprehensive Thomson Reuters SDC merger database and equity values are from CRSP. I find that weaker corporate governance is associated with inferior stock market reactions upon announcement of an acquisition. This result should be of interest to regulators as they monitor corporate actions for covert motives, and to investors in their investment selection process. I then explore which aspects of corporate governance have the most significant connection to the equity market reception. Surprisingly, a parsimonious index of two factors has the explanatory power of the 55 available governance attributes in this bank merger context. I also show that in this dataset, which is composed of US banks purchasing US entities, acquirers with stronger (weaker) governance have a propensity to select targets with stronger (weaker) governance. Lastly, for cases in which the target firm is a bank that is publicly held or that has an ultimate parent that is publicly held, I investigate whether good governance at the target or its parent is associated with more positive movement of the acquirer's equity price at the time of the merger announcement. The results are robust to the use of a bank sector market index in place of the overall market index.
Piskula, Thomas J., "Governance and Merger Activity in Banking" (2011). CUNY Academic Works.