• Corporate governance;
  • Mergers and acquisitions;
  • Diversification discount
  • G32;
  • G34


Using 1640 observations of completed acquisitions from 1996 to 2003, we investigate the relation between corporate governance and returns to bidders and targets. We find that the cumulative abnormal returns for acquirers are significantly negative upon announcement of acquisitions for the full sample and for the related and diversifying subsamples. However, we find that diversifying acquisitions, when conducted by firms with a higher percentage of outsiders on the board, improve returns. Furthermore, we separately examine high-technology and non-high-technology firms to test the relation between board characteristics and announcement returns in different information asymmetry environments. We also find that diversifying acquirers with independent boards perform better than those with insider-dominated boards and the results are especially pronounced for high-technology firms. Taken together, the results suggest that firms with better incentive alignment will be more likely to be perceived by the market as stronger performers in acquisitions. In sum, we find that corporate governance plays an important role in determining wealth creation for our sample of acquiring firms.