Protective governance choices and the value of acquisition activity

Protective governance structure is often viewed as costly to minority shareholders who bear the costs of opportunism by entrenched managers. A less common view is that protective governance encourages value-enhancing initiative, allowing risk-averse managers to pursue projects they would otherwise forgo. To assess these views we examine the acquisition decisions of S&P 500 firms between 1994 and 2005 and document two entrenching dimensions of governance: founding family presence and larger boards with more inside directors. We find that family firms destroy value when they acquire, consistent with an agency cost explanation for acquisitions. In contrast, firms with large boards and more insiders are more likely to acquire and to create value when they do acquire. These results are consistent with benefits to managerial initiative when managers are insulated from discipline. Finally, we find no systematic evidence that shareholder right limiting provisions either facilitate managerial entrenchment or lead to wealth losses through acquisition activity.