Corporate governance dynamics in strategic decisions: evidence from major acquisitions and large loss acquisitions

Seunghee Choi

doi:10.17918/etd-2816

This dissertation examines the role of cooperate governance dynamics in influencing the decision process. I define corporate governance dynamics in two ways; (1) manipulation, interplay and interaction among governance mechanisms including CEO power and attributes, internal governance, managerial compensation, and external control by bidders, and (2) the changes in corporate governance structure as a response to the economically significant outcome of a strategic decision. In the first essay, "Explaining the choice of major acquisition: Evidence of corporate governance dynamics", examine firms that ratify and implement major acquisitions. Major acquisitions are strategic bets that reflect the firms' strong commitment to strategic change but do not necessarily guarantee economic gain, as they carry significant risk of economic loss. I present evidence that the decision to implement a major acquisition is significantly driven by CEOs' attributes and compensation. In general, CEOs of firms making major acquisitions are younger, are recently hired as CEOs, and are in an environment that is amenable to risk taking. Managerial compensation is less sensitive to performance and more sensitive to firm-size expansion. Those boards ratifying major acquisitions are not necessarily less independent or less efficient in any meaningful way; however, their oversight committees tend to be less independent. Firms with superior long-term stock performance also favor risky choices. I also find the presence of outside blockholders reduces the propensity to take strategic bets. In the second essay, "Cooperate GovernanceDynamics in Strategic Decisions: Evidence from Major Acquisitions and Large Loss Acquisitions", examine firms making major acquisitions resulting in large losses and major acquisitions resulting in large gains and identify weaknesses and strengths in their respective governance structures. Large loss bidders are characterized by entrenched and powerful CEOs facilitated by weak monitoring systems, internal and external. Their boards of directors are less independent, as are their oversight committees, and less efficient. They are more insulated from the market for corporate control. The compensation of their CEOs has high option intensity, implying CEO confidence, and is designed to reward firm-sales-volume expansion. On the other hand, I find firms making major acquisitions resulting in large gains are characterized by greater independence in their boards and committees and by higher board efficiently. They have higher managerial ownership and the compensations of their CEOs have high bonus incentive and low option incentive. Consequently, their CEOs incur a higher fraction of the cost of poor decisions. Finally, I present evidence of the corporate governance dynamic triggered by a large loss acquisition. I find that firms experiencing large losses in major acquisitions improve their internal governance structure over the subsequent three years by raising the level of on their boards as well as the board's independence.

Corporate governance dynamics in strategic decisions: evidence from major acquisitions and large loss acquisitions

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Corporate governance dynamics in strategic decisions: evidence from major acquisitions and large loss acquisitions

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