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Corporate Governance and Diversification


  • Acknowledgments: We wish to thank two anonymous referees and the Editor Chang Soo Kim of the Journal for their valuable comments. We also thank Joon Ho Hwang, Weihong Song, seminar participants at Bowling Green State University, Florida Atlantic University, Northern Kentucky University, session participants at the 2006 FMA annual meeting, the 2011 Annual International Conference on Asia-Pacific Financial Markets and the 2006 Global Finance Conference, where the paper received the Best Paper Award of Bovespa - Bolsa de Valores de Sao Paulo, for their helpful comments. Yong H. Kim gratefully acknowledges the financial support from the George Scull Fund of the University of Cincinnati Foundation. Any remaining errors are our own.

Corresponding author: Young Sang Kim, Haile/US Bank College of Business, Northern Kentucky University, Highland Heights KY 41099, USA. Tel: 1-859-572-5160, Fax: 1-859-572-6177, email:


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.