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E-MailThe following post comes to us from Elijah Brewer III, Professor of Finance at DePaul University; William E. Jackson III, Professor of Finance and Management at the University of Alabama; and Julapa A. Jagtiani, Special Advisor at the Federal Reserve Bank of Philadelphia.
In the paper Corporate Governance Structure and Mergers, which was recently made publicly available on SSRN, we examine the balance of control between top-tier managers and shareholders using data from bank mergers over the period 1990-2004. Several studies have investigated the role of independent outside directors at nonfinancial firms. Independent boards (with more than 50 percent outside directors) have been reported in the corporate finance literature to be associated with larger shareholder gains and more effective monitoring of management. Unlike the corporate finance literature on nonfinancial firms, the role of independent outside directors in banking firms has not received much attention in the literature. The role of independent outside directors in banking firms could be very different from those of nonfinancial firms due to banking regulations and supervision (at the state and federal level), deposit insurance, and too-big-to-fail implications for very large banks.
We define bank boards to be independent if the proportion of independent directors is more than our sample median of 77.5 percent. We use criteria higher than the usual 50 percent used for nonfinancial firms because banks are more likely to seek more outside directors. Our model controls for the risk characteristics of the target banks, the deal characteristics, and the economic environment. The results are robust and indicate a significant positive relationship between independence of the target’s board and the size of merger prices — i.e., the abnormal returns and the merger premiums accrued to target shareholders. Unlike independent outside directors, the target’s managerial share ownership and the presence of independent blockholders have a negative impact on the merger price of the target bank.
Our results are consistent with the implication that as corporate boards increase the percentage of inside directors, merger prices negotiated for target shareholders tend to decrease. A possible explanation for this is that top-tier managers tend to trade potential takeover gains in return for their own personal benefits in terms of job security and other post-acquisition benefits with the bidding firm. The positive and significant results that we report for the acquirers’ abnormal returns around the merger announcement dates support this conjecture.
The full paper is available for download here.
One Comment
The practice of having independent outside directors in banking firms is still a foreign idea in the country where I live in. I wish to learn more about it. I tried researching about it in the Harvard Business Review but, as said here, this topic has not received much literature.