Abstract:
This paper addresses the question of whether independent directors of the bidding firm are effective monitors during acquisitions and whether this effectiveness is impaired when the independent directors serve on multiple boards. The choice of the acquisition setting, where the board of directors is known to be engaged in active decision-making, facilitates a direct test of the role of independent directors as effective, external monitors of the board¿s activities. We employ three indicators of the bidding board¿s performance in making optimal acquisition decisions: the acquisition premium (benchmarked against subsequent performance), a new indicator comprising the conflicts of interest associated with the acquisitions (conflicted acquisitions), and the post-acquisition stock performance. The results suggest that more independent boards and busy independent directors on the bidding firm¿s board are associated with more effective acquisition decisions by the board. However, busy independent directors are associated with less effective acquisition decisions when the bidding firm has higher free cash flows consistent with Jensen (1986). We also find that busy executive directors on the bidding firm¿s board have no implications for the effectiveness of acquisition decisions unless the director is a busy chairperson or busy CEO both of whom are associated with less effective acquisition decisions. This paper contributes direct evidence on the effectiveness of bidding firm independent directors in their role as monitors and decision-makers.
