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The impact of firm ownership, board monitoring on operating performance of Chinese mergers and acquisitions

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Abstract

In this paper, we employ board monitoring mechanisms and within-firm governance variables to investigate the operating performance of 340 mergers and acquisitions in China over the 2004–2011 period. Our results document a significant deterioration in post-acquisition operating performance of acquiring firms over 12–36 months. We find independent directors, managerial shareholding, ownership concentration have a positive and significant impact on operating performance of acquiring firms. However, the related party transactions exert a negative and significant effect on matched control adjusted ROA. Further analysis of our sub-sample indicates that privately owned enterprises are better monitors compared to the state owned enterprises.

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Notes

  1. Under comparison group 1 (that is, size), we estimate the operating performance by compare the difference between sample firm and control firm matched by size.

    \( AOP_{i,t}^{L} = P_{i,t} - CP_{i,t}^{2} \)

    Under comparison group 2 (that is, book to market ratio), we estimate the operating performance by compare the difference between sample firm and control firm matched by book-to market ratio.

    \( AOP_{i,t}^{L} = P_{i,t} - CP_{i,t}^{3} \)

  2. Failure of internal governance of firms may activate an external control device – called market for corporate control first conceptualized by Manne (1965). This market involves takeovers of firms that have failed to make most efficient use of their resources and/or engaged in agency problem.

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Acknowledgement

The authors would like to thank Professor C-F Lee, the Journal’s editor, and the two anonymous reviewers for their insightful comments. We also acknowledge the financial support from National Natural Science Foundation, Zhejiang, China: project ID: LQ12G020025.

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Authors and Affiliations

  1. Department of Economics, Finance and Risk, Glasgow School of Business and Society, Glasgow Caledonian University, Cowcaddens, Glasgow, G4 0BA, Scotland, UK

    Agyenim Boateng & Sanjukta Brahma

  2. Nottingham University Business School, University of Nottingham, China Campus, 199 Taikang East Road, Ningbo, 315100, Zhejiang Province, People’s Republic of China

    **aoGang Bi

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  1. Agyenim Boateng
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Correspondence to Agyenim Boateng.

Appendix: Variable definitions

Appendix: Variable definitions

Variable

Definition/measurement

Acquirer cash holding

Acquirer’s cash and cash equivalent scaled by total assets

Acquirer leverage

Ratio of total liabilities to total noncash assets

Acquirer price run-up

Acquirer price run-up (pre-event 12 month BHAR)

Acquirer size

Acquire market capitalization (in billions) at year end prior to acquisition announcements

Acquirer Tobin Q

Acquirer Tobin’s Q at year end prior to acquisition announcements

Cash payment

A dummy variable that equals one when payment is 100% cash and zero otherwise

CEO duality

A dummy variable that equals one if CEO and chairman are the same person and zero otherwise

Independent director

Percentage of independent directors on the board of directors

Managerial ownership

Percentage shares of firm held by managerial team of acquirers prior to acquisition announcements

Relatedness

Acquirer and target are in same CSRC industry

Related party transaction

Number of related party transaction over previous 12 month, See (Chen et al. 2012)

Shareholder concentration

Percentage shares held by top 5 shareholders

Transaction value

Deal transaction value scaled by acquirer total assets prior to acquisition announcements

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Boateng, A., Bi, X. & Brahma, S. The impact of firm ownership, board monitoring on operating performance of Chinese mergers and acquisitions. Rev Quant Finan Acc 49, 925–948 (2017). https://doi.org/10.1007/s11156-016-0612-y

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