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Review of Accounting Studies

Erschienen in:

16.06.2018

Corporate governance roles of information quality and corporate takeovers

verfasst von: Jing Li, Lin Nan, Ran Zhao

Erschienen in: Review of Accounting Studies | Ausgabe 3/2018

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Abstract

We examine the corporate governance roles of information quality and the takeover market with asymmetric information regarding the value of the target firm. Increasing information quality improves the takeover efficiency however, a highly efficient takeover market also discourages the manager from exerting effort. We find that perfect information quality is not optimal for either current shareholders’ expected payoff maximization or expected firm value maximization. Furthermore, current shareholders prefer a lower level of information quality than the level that maximizes expected firm value, because of a misalignment between current shareholders’ value and total firm value. We also analyze the impact of antitakeover laws, and find that the passage of antitakeover laws may induce current shareholders to choose a higher level of information quality and thus increase expected firm value.

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Previous studies, such as Martin and McConnell (1991) and Kini et al. (2004), document a significant CEO turnover during takeovers, and also find a negative relation between the pre-takeover performance and post-takeover CEO turnovers. Even if a CEO remains in place, he/she may lose the power to make decisions or may not enjoy the same private benefit after the acquirer takes control.

“Information quality” in our paper can be interpreted as the informativeness of financial reporting or the quality of the information system. A system with higher information quality provides more accurate signals about firm values and facilitates valuations by investors. As suggested by Armstrong et al. (2010), a board of directors can affect a firm’s information environment through (or compel the manager to commit to) several mechanisms, including a commitment to timely financial information, hiring a high-quality auditor and establishing an independent audit committee, inviting outside financial experts as directors, and maintaining or encouraging more active investors as monitors.

We assume that current shareholders obtain the perfect information about firm value for simplicity. A variation of our model could assume that shareholders observe a noisy signal about firm value, but the acquirer receives a less precise signal than what shareholders observe. Our main results are robust to this variation.

In our model, we assume that the synergy value from takeover is independent of the target firm value. This assumption can be relaxed to allow asymmetric synergy values in high- and low-value firms (i.e., \(\phantom {\dot {i}\!}v_{0}\) depends on v). Our results remain robust as long as the synergy value through takeover does not overwhelm the prior firm value generated by management effort (i.e., \(\phantom {\dot {i}\!}v_{0}< 1\)). A detailed analysis is available upon request.

γ can be interpreted as the relative bargaining power over the synergy value created by the acquisition. The split of synergy value in an acquisition usually depends on factors such as the market power (or target scarcity) and the product market dependence (customer-supplier relationship) between the target and the acquirer (Ahern 2012), and these exogenous factors are not driven by the information asymmetry about the target firm’s current value.

In the main setting, we assume that m is the manager’s only benefit that compensates for his effort, as we want to concentrate on the disciplinary role of the takeover market instead of other incentive mechanisms. In Section 5 we show that our main results are robust when we introduce a performance-based compensation contract.

The reason is as follows. First, in order to induce the high-value-firm shareholders to tender, the acquirer only needs to offer exactly \(\phantom {\dot {i}\!}1+(1-\gamma )v_{0}\). Any price above \(\phantom {\dot {i}\!}1+(1-\gamma )v_{0}\) is not optimal for the acquirer, as it merely increases the takeover cost while yielding the same takeover outcome. In addition, the acquirer would not offer any price between \(\phantom {\dot {i}\!}p_{h}\) and \(\phantom {\dot {i}\!}p_{l}\). To see this, suppose the acquirer offers a price \(\phantom {\dot {i}\!}p^{\prime }\) and \(\phantom {\dot {i}\!}(1-\gamma ) v_{0}<p^{\prime }<1+(1-\gamma ) v_{0}\); in this scenario, only the low-value firms’ shareholders accept \(\phantom {\dot {i}\!}p^{\prime }\). However, the acquirer can benefit by reducing the offer price to \(\phantom {\dot {i}\!}(1-\gamma )v_{0}\), which yields the same takeover outcome (i.e., successful takeover of a low-value firm) without an additional overbidding premium.

Notice that even though \(\phantom {\dot {i}\!}\alpha _{G}^{\ast }= 1\) appears in the separating-price-bidding equilibrium when \(\phantom {\dot {i}\!}d = 1\), we will never observe a good signal in that equilibrium, because the manager’s effort incentive is completely eliminated and thus firm value is always low, which will always result in a bad signal by the perfect information system.

Control-share-acquisition laws provide the holders of shares not held by the acquirer the right to decide whether the acquirer’s shares have voting rights in takeovers. Fair-price laws require the acquirer to pay a fair price for the shares for takeover purposes. The fair price is calculated using rules such as the maximum the acquirer paid for shares acquired in the preceding two-year period. In essence, the fair-price laws impede a takeover by forcing the acquirer to pay a high price for shares. Finally, business-combination laws prohibit the acquirer from specified transactions, such as sales of assets, mergers, and relational transactions, for a number of years unless the board votes otherwise. Overall, these antitakeover laws make takeovers more difficult and costly to acquirers with the aim of deterring takeovers (Romano 1992).

For example, Ambrose and Megginson (1992) and Bhagat and Jefferis (1994) find little evidence that antitakeover defenses reduce takeover activities.

Proposition 6 shows the results when the optimal likelihood ratios have interior solutions. We may also have cases in which the optimal likelihood ratios are in a low range to sustain the low-price-bidding equilibrium, but, in general, \(\phantom {\dot {i}\!}L^{*}_{Gs}\le L^{*}_{Gv}\) always holds.

The reason is that, in equilibrium, both the manager’s effort and the acquirer’s bidding strategy depend on the difference of two compensation schemes, \(\phantom {\dot {i}\!}w(G)-w(B)\). Therefore, current shareholders can always reduce \(\phantom {\dot {i}\!}w(B)\) to zero to maximize their expected payoff, yet maintain the manager’s effort and the acquirer’s bidding strategy in the same equilibrium.

If we let \(\phantom {\dot {i}\!}\alpha _{G}^{*}\) and \(\phantom {\dot {i}\!}\alpha _{B}^{*}\) be any value as long as they satisfy \(\phantom {\dot {i}\!}\alpha _{G}^{*}+\alpha _{B}^{*}= 2\left (1-\frac {1}{m(1+\gamma v_{0})}\right )\), we can still show that the optimal payoff functions for shareholders and firm value remain the same as our current results. All analyzes will not be affected.

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Titel: Corporate governance roles of information quality and corporate takeovers
verfasst von: Jing Li
Lin Nan
Ran Zhao
Publikationsdatum: 16.06.2018
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 3/2018
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-018-9449-z

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