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Best Practices in Corporate Governance: What Two Decades of Research Reveals

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  • Anil Shivdasani
  • Marc Zenner

Abstract

This report addresses two key questions for today's top executives: Do acquisitions create value for acquirers? And under what circumstances have acquisitions created the most value for acquiring shareholders? The authors' analysis of over 1,500 completed deals by non‐financial companies in the United States over the past 12 years shows that, at announcement, acquirers' shareholders suffer small losses, on average, in the short term around the initial deal announcement. Over longer intervals, such as one or two years following the announcement of the transaction, acquirers tend to slightly outperform industry peers. The average or median market response hides tremendous variability in how the market has reacted to individual deals, however. This article provides evidence that the “right” M&A transaction can create substantial value for acquirers. One‐quarter of the transactions lead to market‐adjusted gains in excess of 5% for the acquirer and oneeighth of the transactions lead to gains in excess of 10% in the short term. However, some deals have also destroyed substantial shareholder value. Financing structure is a key driver of the stock market reaction. Stock‐financed transactions, on average, have a negative stock market reaction, while cash‐financed transactions have benefited acquirers in both the short term as well as the long term. Acquisitions of private companies or assets and units of public companies have consistently generated higher returns for acquirers than purchases of public companies. Moreover, EPS dilution is not a major driver of how the stock market reacts to a deal. Although “accretive” deals perform slightly better than “dilutive” ones in the short and long run, the difference is small and not statistically significant. Over the long run, acquiring shareholders have benefited the most from deals within the same industry and that avoid targets with relatively optimistic earnings growth projections.

Suggested Citation

  • Anil Shivdasani & Marc Zenner, 2004. "Best Practices in Corporate Governance: What Two Decades of Research Reveals," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(2‐3), pages 29-41, March.
  • Handle: RePEc:bla:jacrfn:v:16:y:2004:i:2-3:p:29-41
    DOI: 10.1111/j.1745-6622.2004.tb00536.x
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    Cited by:

    1. Sterling Huang & Gilles Hilary, 2018. "Zombie Board: Board Tenure and Firm Performance," Journal of Accounting Research, Wiley Blackwell, vol. 56(4), pages 1285-1329, September.
    2. Ge Bai, 2013. "How Do Board Size and Occupational Background of Directors Influence Social Performance in For-profit and Non-profit Organizations? Evidence from California Hospitals," Journal of Business Ethics, Springer, vol. 118(1), pages 171-187, November.
    3. Aida Maria Ismail & Zuria Hajar Mohd Adnan & Fadzlina Mohd Fahmi & Faizah Darus & Colin Clark, 2019. "Board Capabilities and the Mediating Roles of Absorptive Capacity on Environmental Social and Governance (ESG) Practices," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(3), pages 11-30, May.
    4. Erlane K Ghani & Ham Xairyani Mohamed & Kamaruzzaman Muhammad, 2019. "Board Characteristics and Foreign Direct Investment in Public Listed Property Companies: A Malaysian Evidence," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(3), pages 116-131, May.
    5. Chris GROSE & Dimitrios KOUFOPOULOS & Ioannis GKLIATIS & Konstantinos ATHANASIADIS & Michail FYGKIORIS, 2022. "Board characteristics and board committees in the Greek corporate governance framework," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 13(4), pages 400-417, January.
    6. Akshita Arora & Chandan Sharma, 2015. "Impact of Firm Performance on Board Characteristics: Empirical Evidence from India," IIM Kozhikode Society & Management Review, , vol. 4(1), pages 53-70, January.
    7. Muhammad Azeem Naz & Rizwan Ali & Ramiz Ur Rehman & Collins G. Ntim, 2022. "Corporate governance, working capital management, and firm performance: Some new insights from agency theory," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1448-1461, July.
    8. Kathy Fogel & Liping Ma & Randall Morck, 2021. "Powerful independent directors," Financial Management, Financial Management Association International, vol. 50(4), pages 935-983, December.
    9. Narsa Goud Neralla, 2022. "Can corporate governance structure effect on corporate performance: an empirical investigation from Indian companies," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(3), pages 282-300, September.

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