1. Introduction
Corporate merger and acquisition (thereafter M and As) decisions are critical to business growth and financial development (
Hitt et al. 1990). M and As are considered successful if they lead to higher efficiency for the new entity or the acquiring firm (
Kumar and Bansal 2008). Increased efficiency can be attributed to several important factors, including managerial skills, cost efficiency, financial resources, technology, and better marketing skills, etc. (
Buckley et al. 2022;
Capron 1999;
Kang and Johansson 2000;
Rahman and Lambkin 2015). The acquiring firm’s corporate governance (thereafter CG) also plays an important role when a firm goes for merger and acquisition deals (
Holmstrom and Kaplan 2001). It has been discovered that board independence and CEO duality affect acquisition performance (
Pham et al. 2015;
Teti et al. 2017). Consistent with the majority of CG literature, which suggests that independent directors aid businesses in making better judgments, more independent boards support businesses in pursuing value-adding acquisitions in M and A policies (
Dutta and Kumar 2009;
Tarighi et al. 2023;
Teti et al. 2017).
The presence of CEO duality helps large boards with coordination and communication issues, while simultaneously enhancing information flow and decision-making quality. When it comes to intricate strategic responsibilities such as M and As, combining the two jobs might enhance the board’s decision-making ability. Under stronger and more cohesive leadership, companies with sizable boards can gain from an expanded pool of directors and generate value through merger transactions (
Alshabibi 2021;
Tampakoudis et al. 2022).
Agency theory is used in most research to examine how board characteristics affect acquisition performance. Novel techniques utilizing alternative frameworks, such as Resource Dependency Theory, have been essential, as they demonstrate that directors can affect value creation in M and As in ways other than monitoring (
Redor 2016).
Previous research has primarily focused on either M and A s or CG as distinct disciplines of study. CG and M and A are among the most important fields of finance research. Specifically, this study aims to determine the impact of CG variables on shareholder stock market performance and accounting returns while controlling for various firm characteristics when acquiring a company.
CG parameters, such as board size, board independence, and CEO duality, were examined in the Indian scenario. This study examined the influence of CG mechanisms present in bidder firms on their performance. Most studies in this field have focused on accounting- and market-based measures. However, this study examines the impact of calculating cumulative abnormal returns both in the short and long run for acquiring companies.
As dependent variables, accounting-based methodologies, such as the return on assets and return on equity, have favored much of the research on the relationship between CG and performance in industrialized countries. Numerous studies on the performance of acquiring companies regarding CG elements have yielded mixed results. Limited research on market-based performance has been conducted in India. Consequently, to make a significant conclusion, it is necessary to evaluate the performance of acquiring a company using a battery of indicators.
The study found that acquiring companies’ short-term capital market performance was positively impacted by board size. The results are consistent with earlier research in this area (
Dahya et al. 2016;
Teti et al. 2017), suggesting that larger boards may be in a better position to offer management more insightful strategic counsel and help them make better M and A choices.
The remainder of this paper is organized as follows.
Section 2 summarizes earlier research, and
Section 3 discusses the empirical model and data collection methodology. The results of this study are discussed in
Section 4. Finally,
Section 5 provides conclusions, implications, and limitations.
2. Literature Review
Among the earliest studies,
Desai et al. (
2003) examined the relationship between CEO duality and acquisition performance using a sample of 149 publicly traded US firms. The author finds evidence that CEO duality negatively impacts firm performance, supporting agency theory.
Similarly,
De Jong et al. (
2007) used CG variables such as the takeover defense index, percentage of insider ownership, board size, and percentage of block shareholders for listed firms in the Netherlands and found limited evidence of CG and acquirer performance. Further,
Brewer et al. (
2010) investigated the relationship between firm-level CG variables and M and As in the banking sector from to 1990–2004 and found CG variables such as independent directors, independent block holders, and managerial share ownership play a crucial role in increasing the wealth generated by M and A transactions.
Amar et al. (
2011) investigated CEO attributes, board composition, and governance characteristics of the acquiring companies over 273 M and A s in Canada during the period from to 1998–2002. The author concluded that, while board size has a negative impact on the performance of the acquiring firm, CEO ownership and board independence have a positive impact.
Another study by
Afza and Nazir (
2012) examined the connection between the CG profile of acquiring companies and the changes in operating performance brought about by M and As in Pakistan and found that board size and CEO duality have a negative relationship with firm performance. Similarly,
Dahya et al. (
2016) examined the impact of CG variables, such as the effect of outsider directors on acquiring companies’ performance on UK mergers and concluded that director representation is related to better acquirer returns in deals involving listed targets, but not with respect to private firms.
Teti et al. (
2017) investigated whether CG mechanism variables such as CEO duality and board independence influence M and A performance in the US context from to 2009–2013. The results indicate that board independence and CEO duality have a positive impact on the return on acquisitions.
Similarly,
Tampakoudis et al. (
2018) evaluated the impact of M and As from 2003 to 2017, using a sample size of 349 M and A s across all sectors in the European context. They use different CG proxies, such as board size, voting rights, and anti-takeover provisions, and investigate their effects on acquiring firm market performance. This result suggests that a large board is negatively related to the announcement return to the acquiring firm.
More recently,
Awan et al. (
2020) examined the role of CG in acquiring firm performance in Pakistan from 2004 to 2017. The findings of the study indicate that CG variables such as CEO duality and the presence of a board of directors are important for acquiring firm performance.
Further, previous research has primarily focused on either M and A s or CG as distinct disciplines of study. CG and M and A are among the most important fields of finance research. Furthermore, studies in this field have focused on accounting- or market-based measures. Accounting-based methodologies, such as return on assets and return on equity, have favored much research on the relationship between CG and performance in industrialized countries. Numerous studies on the performance of acquiring companies regarding CG elements have yielded mixed results. Limited research on market-based performance has been conducted in India (
Appendix B). Consequently, to make a significant conclusion, it is necessary to evaluate the performance of acquiring a company using a battery of indicators.
In light of this, this study examines the linkage between CG and the firm performance of 124 acquiring companies from 2014 to 2020. It employs both market- and accounting-based indicators after controlling for firm-specific characteristics to investigate the effects of “internal corporate governance” on the performance of acquiring firms.
4. Results
This section discusses the descriptive summaries, correlation results, and regression results to analyze the effects of the selected CG variables and control variables on various performance measures.
Table 3 reports the descriptive statistics for all 124 listed acquiring firms from 2014 to 2020. The first set of variables CAR [−5, +5], CAR [−2,+ 2] are related to short-term market performance measure; the minimum abnormal returns for the window period CAR [−5, +5] is −0.59, which is a negative return of 59% and maximum returns for the window period is 39.4%. The average abnormal return for CAR [−5, +5] is −0.014, generating a negative abnormal return to the shareholder. The second window period selected for the study is [−2, +2], having a maximum value of 0.310, and the average return is around 0.008. The BHAR [0, +12] [0, +24], is used to measure long-term market performance. The average return of the BHAR [0, +12] is −0.003, and BHAR [0, +24] for the window period is 0.007. It is important to note that except for BHAR [0, +24], the mean return is negative, giving preliminary evidence of lower performance of M and A deals in the short and medium term. The sample firm’s average ROA ratio is 3.15 and 0.18 for ROE. The ROA ratio appears on the higher side which is due to high variation in the profitability of the companies during the period of M and A’s. The same is reflected in high standard deviation, minimum and maximum values. The mean of Tobin’s Q ratio is around 2.573. The average board size is around nine directors, with a maximum board size of 19 and a minimum of 1, roughly in line with the size of directors for Indian acquiring firms.
Further, according to the Indian Companies Act of 2013, one-third or more of the directors of the board must be independent. The average proportion of independent directors on the board was approximately 51.3%. CEO duality is a binary variable that measures CEO duality used in the study. The values of the control variables used in the study for the selected acquiring firms from 2014 to 2020 are also listed in
Table 4. Firm size is defined as the natural log of the value of a firm’s total assets. The average firm size is 8.653.
Furthermore, leverage is the ratio of total debt to equity with an average of 8.63%. The maximum leverage value is 5.38%, with acquiring firms accounting for most of this high leverage. The maximum age of acquiring firms was 146 years, indicating the existence of public firms in the study. The average beta of acquiring firms in the study was 0.69, with a maximum beta of 1.69. The standard deviation of returns used to capture the volatility of the study was found to be, on average 16.4%. The average price-to-book value ratio, used as an indicator for growth firms, was an average of 2.3 for Indian acquiring firms. The average R&D expenses were 0.009 for Indian acquiring firms. On average, the sales growth for the selected acquiring firms was 35.68%. The cash equivalent to total assets was 7.77% for acquiring firms.
Table 4 reports the correlation table of various performance measures and firm-specific factors. The board size is significantly correlated with CAR [−2,+ 2], BHAR [0, +12], BHAR [0, +24], and Tobin’s Q ratio. Board independence has also been negatively correlated with BHAR [0, +24], the ROE of the acquiring firms. Firm age significantly relates to the acquiring firms’ BHAR [0, +12]. Beta is statistically insignificant with CAR [−5,+5], CAR [−2, +2], and BHAR [0,+12] performance measures. Leverage is correlated and significant with market performance measures, that is, Tobin’s Q ratio. The market performance measures BHAR [0, +12], and Tobin’s Q ratio is inverse and statistically significant with a standard deviation of stock returns. The price-to-book ratio is correlated with ROA, ROE, and Tobin’s Q ratio. Research and development have also been found positive and statistically significant with ROA. Sales growth significantly correlates with CAR [−5,+5] and CAR [−2,+2].
Before proceeding to the multivariate cross-sectional regression analysis we tested the variance inflation factor (VIF) for our independent variables have been presented in
Appendix A. The results of VIF indicate that the issue of multicollinearity is not present. We then investigate the impact of CG factors and firm-specific factors that influence short- and long-term market performance. We then present the results of the multivariate cross-sectional regression analysis to investigate the impact of CG factors and firm-specific factors that influence short- and long-term market performance. Model 1 in
Table 5 shows the effect of CG measured on the CAR [−5, +5] window period. Board size has a significant and positive impact on the abnormal returns of acquiring firms. Other CG variables such as board independence and CEO duality seem insignificant when measured using the CAR [−5, +5] window period. For the control variables, R&D expenses to total sales are negative and statistically significant for acquiring firms’ performance with the announcement period measured by CAR [−5, +5]. A possible explanation for the positive impact of board size on acquiring firms’ performance can be linked to the effective monitoring and decision-making skills of diversified and larger boards. Firms will benefit from increased experience, ideas, proposals, and assistance from a larger board of directors, providing them with essential resources and substantial investment opportunities. This increases the performance of businesses and benefits the shareholders.
Model 2 in
Table 5 shows the analysis of CG measured on cumulative abnormal return, which measures short-term capital market performance with a CAR [−2, +2] window. In line with the results of Model 1, board size has a significant and positive effect on acquiring firms’ abnormal returns. Further, board independence and CEO duality are insignificant predictors when the CAR [−2, +2] performance period is considered. For the control variable R&D expenditure, the SD of returns negatively influences the acquiring firm’s performance in the short-run window period. However, the relationship is positive and significant for sales growth.
Model 3 in
Table 5 shows the relationship between BHAR as a measure of long-term capital market performance with the BHAR [0, +12] window period and the CG variables. The study finds that board size has a significant and positive effect on the long-run abnormal returns of acquiring firms. However, board independence and CEO duality were insignificant factors when studying the relationship with BHAR one year after the event. The relationship between R&D expenses and long-term profitability seems negative and significant when measured through the BHAR period [0, +12].
Model 4 in
Table 5 reports the relationship between CG and firm performance, measured through BHAR [0, +24], which measures long-term capital market performance. Except for board size, both board independence and CEO duality are insignificant. In the case of control variables, the firm’s R&D was negative and statistically significant.
Model 5 in
Table 6 presents the results for the relationship between a firm’s CG and ROA, a measure of accounting-based performance. Except for board independence, board size and CEO duality were not statistically significant and therefore had no impact on firm performance. The relationship between the price-to-book value ratio, R&D, and beta is positive and significant, whereas firm size and leverage are negative.
Similarly, Model 6 in
Table 6 reports the relationship between CG and ROE, which is used to measure accounting-based performance. In line with previous results, board size and board independence were statistically insignificant and therefore had no impact on acquiring firm performance. In the case of CEO duality, this study found the relationship to be negative and significant. The price-to-book value ratio is positive and significant and influences firm performance.
Model 7 examines the effects of CG and Tobin’s Q ratio, which is used to measure market-based performance. Board size is positive and significant, with a coefficient value (0.132) with firm performance. Board independence also has a statistically significant positive coefficient of 1.297. The price-to-book value ratio was positive and significant.
Model 8 presents the results for the effect of CG on stock returns. Board size, board independence, and CEO duality have no impact on performance, as measured through stock returns. Firm size was negative and significant, with a coefficient of −0.013 for the stock return performance measurement. R&D expenses have also been found to have a positive and significant effect on acquiring firms’ stock returns.
5. Discussion and Conclusions
This study empirically examines the effect of CG characteristics on acquiring companies’ financial performance using a sample of 124 companies in the Indian context. This study uses various alternate proxies of firm performance, such as accounting-based measures and market-based measures, to analyze the various important CG characteristics, such as board size, board independence, and CEO duality, which influence acquiring companies’ financial performance in M and A. The study found that board size has a significant impact on the short-term capital market performance of acquiring companies. These results are similar to those of
De Jong et al. (
2007),
Brewer et al. (
2010),
Dahya et al. (
2016),
Awan et al. (
2020), and
Defrancq et al. (
2021). Furthermore, the results also contradict previous studies by
Amar et al. (
2011),
Afza and Nazir (
2012), and
Tampakoudis et al. (
2018), who found a negative relationship between board size and capital market performance. Further, the study found limited evidence of the effect of board independence and CEO duality in both the short and long terms, as these were found to be insignificant factors when studying the relationship between accounting and market-based measures. The results contradict the findings of
Desai et al. (
2003);
Masulis and Mobbs (
2011);
Teti et al. (
2017) which have found significant relationship between board independence and firm performance post-merger. With regard to the other variables, (study) found that the price-to-book value ratio (
Roll 1986) and R&D expenses positively influence acquiring companies’ performance and firm size to be negatively related to firms’ performance, which is in line with
Moeller et al. (
2004) and
Masulis and Mobbs (
2011).
A possible explanation for the positive impact of board size on acquiring firms’ performance can be linked to the effective monitoring and decision-making skills of diversified and larger boards. Firms will benefit from increased experience, ideas, proposals, and assistance from a larger board of directors, providing them with essential resources and substantial investment opportunities, thus increasing the performance of businesses and benefiting shareholders. Larger boards tend to have a broader diversity of talent, business relationships, and experience than smaller boards, which means they have a better chance of securing vital resources. Second, larger boards of directors expand the knowledge base, which boosts managers’ ability to make significant and better business decisions, thereby increasing their effectiveness. Finally, it has been established that the monitoring capacity of a corporate board is positively connected to the size of the board, as more people with a diverse range of expertise are better positioned to subject managerial choices, such as mergers and acquisitions, to more examination and supervision.
The findings suggest that independent perspectives on the board of directors have a bearing on firm performance both in the short and long term, and can help companies generate benefits when pursuing M and A transactions. However, existing literature states that independent directors can help companies make better decisions, and having more independent directors helps companies avoid disasters and failures. Numerous examples of CG failures that have resulted in the collapse of firms exist worldwide and in India. This is not reflected in our results, where we find limited evidence that board independence is linked to higher firm performance. Therefore, emphasis should be placed on improving the role of independent board members as watchdogs who make decisions in the interests of stakeholders, which have a bearing on the long-run performance of the company. Consequently, it is critical to build a strategy to implement the nomination and training of independent directors who are efficient and successful in providing independent opinions.
To conclude, while the current research focuses primarily on acquiring firms’ performance, a more in-depth investigation at the country level may yield additional insights into the relationship between diversification, value, and governance. This study excluded empirical observations on local and foreign acquisition characteristics/financial performance in the given country, which might be investigated further. Future studies should examine board connections in countries with weak investor protection and the influence of this connectedness on merger value, given the likelihood that businesses with more independent directors have more linked directors than companies with more inside directors.