Post by Sapphire Capital on Aug 29, 2008 23:22:52 GMT 4
Costs and Benefits of CEO-Board Social Ties: Evidence from Mergers and Acquisitions
Breno Schmidt
University of Southern California - Marshall School of Business
July 30, 2008
Abstract:
I test the hypothesis that social ties between the CEO and outside board members affect the two main functions of the board: monitoring and advising the CEO. Specifically, while stronger ties lead to less independent boards and thus less effective monitoring, they also improve the quality of board advice. Previous literature suggests that the likelihood of agency-driven acquisitions is higher in some cases than others. Yet, the success of a merger can also depend on the quality of board advice. I construct proxies to identify situations in which either board monitoring or board advice is likely to be particularly important. The effects of social ties on the bidder's announcement returns are then examined in each case. Using the (net) proportion of outside board members sharing observable social ties with CEO as a proxy for "friendly boards", I find evidence consistent with the hypothesis presented above. In a sample of 2,545 mergers during the period from 1990 to 2007, I find that the effects of social ties on bidder announcement returns are lower when monitoring needs are likely to be high, e.g., (i) for firms with abundant free cash flows; (ii) when a smaller part of the CEO's pay is tied to performance; and (iii) during merger waves. Conversely, social ties have positive effects on firm value when bidder directors are likely to have valuable information about the target, e.g., when bidder board members also serve as directors of other companies in the target's industry. These results indicate that social ties can have both costs and benefits. They also highlight the potential discrepancy between actual board independence and its regulatory definition.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1219102_code597453.pdf?abstractid=1219102&mirid=1
Breno Schmidt
University of Southern California - Marshall School of Business
July 30, 2008
Abstract:
I test the hypothesis that social ties between the CEO and outside board members affect the two main functions of the board: monitoring and advising the CEO. Specifically, while stronger ties lead to less independent boards and thus less effective monitoring, they also improve the quality of board advice. Previous literature suggests that the likelihood of agency-driven acquisitions is higher in some cases than others. Yet, the success of a merger can also depend on the quality of board advice. I construct proxies to identify situations in which either board monitoring or board advice is likely to be particularly important. The effects of social ties on the bidder's announcement returns are then examined in each case. Using the (net) proportion of outside board members sharing observable social ties with CEO as a proxy for "friendly boards", I find evidence consistent with the hypothesis presented above. In a sample of 2,545 mergers during the period from 1990 to 2007, I find that the effects of social ties on bidder announcement returns are lower when monitoring needs are likely to be high, e.g., (i) for firms with abundant free cash flows; (ii) when a smaller part of the CEO's pay is tied to performance; and (iii) during merger waves. Conversely, social ties have positive effects on firm value when bidder directors are likely to have valuable information about the target, e.g., when bidder board members also serve as directors of other companies in the target's industry. These results indicate that social ties can have both costs and benefits. They also highlight the potential discrepancy between actual board independence and its regulatory definition.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1219102_code597453.pdf?abstractid=1219102&mirid=1