Corporate financial decision making : what is the effect of the board structure on M and A performance?

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MSc Accountancy & Control, track Accountancy Faculty of Economics and Business, University of Amsterdam

Corporate financial decision making: What is the

effect of the board structure on M&A performance?

Yves van Marle 10668543 26 June 2015 Word count: 17.197

Supervisor: Dr.Ir. S.B.H. Morssinkhof Second Reader: Dr.Ir S.P. van Triest

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Page | 2 Statement of Originality

This document is written by student Yves van Marle who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Page | 3 Abstract

This study aims to give a deeper and wider understanding of the influence of corporate governance on a merger or acquisition. More specifically, this study has tested how board size, board independence, CEO duality and financial expertise in the board of directors have influence on the M&A performance of a firm, measured as return on assets. Data for this study has been collected from several databases and contains information of 202 firms based in USA regarding their M&A performance for the period 2010 – 2013. The main finding of this study is that board size has no significant impact on the M&A performance. In addition, board independence has also no significant impact on the M&A performance. An unexpected outcome of this study is that CEO duality has a positive significant impact on the M&A performance. The last finding of this study is that financial expertise has no significant impact on the M&A performance. To conclude, this study has added new knowledge to the corporate governance and M&A literature.

Keywords: Mergers & Acquisition (M&A) performance, Corporate Governance, Board Size, Board Independence, CEO duality, Financial Expertise.

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Page | 4

Mergers and acquisitions (M&As) are becoming more extensively important in the strategy of financial corporate management (Gupta, 2013). The following definition of M&A is given by King, Dalton, Daily and Covin (2004): “A merger is a combination of two firms that form a new firm, while an acquisition is the purchase of one firm by another in which no new firm is formed”. M&A has a significant impact on the financial world and is a popular strategy for managers to expand or to innovate their business (Haleblian, Devers, McNamara, Carpenter & Davison, 2009). Globally, investments are increasing and have reached unequalled levels in the years before the financial crisis in 2008 (Barkema & Schijvens, 2008a). The increase of M&A activity in the corporate world has not been unnoticed by the academic world. Especially within the accounting and finance field, M&A activity has been a more popular subject (Haleblian et al., 2009). An important aspect when a firm is engaging in an M&A is the corporate governance structure (Boone, Field, Karpoff & Raheja, 2007). The board of directors is the main focus when a firm attempts to improve its corporate governance (Boone et al., 2007). The board has more duties to perform than only improving the firms’ corporate governance. According to Veliyath (1999) the board of directors acts as a bridge between shareholders and managers, with the duty to protect the shareholders’ interests. Because the board of directors is of such importance within in a firm many scholars have encouraged more research of board structure on M&A performance (Haleblian et al., 2009; King et al., 2004; Vafeas, 1998). For readability purposes, it is important to give a clearer definition of M&A performance. In the study of Haleblian et al. (2009) the researchers came to the conclusion that there is no universal measurement for M&A performance. They encourage other scholars to use different measures as long as the method is justified and appropriate for the study (Zollo & Meier, 2008). Therefore, in this study Return on Assets (ROA) will be the proxy to measure for M&A performance. Furthermore this study will only focus on firms that have engaged in a merger or acquisition in the years from 2010 – 2013 (Ivashina & Scharfstein, 2010), because during the financial crisis the M&A activity has not been on such a low point in history (KPMG, 2011) and this low M&A activity could give a distorted view of the results (Barkema & Schijvens, 2008a). The objective of this study is to examine the effect of board structure on M&A performance. More specifically, this study will examine the effect of board size, board independence, CEO duality and financial expertise on the return on assets of a firm. This study contributes to existing literature by increasing the

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Page | 6 knowledge of the influence of different components of board structure on a firm when it is engaging in a merger or acquisition. In contrast, many previous researchers have solely focused on event studies or on a specific component of board structure, like board size (Boone et al., 2007; Bruner, 2002; Gupta, 2013; Healy, Palepu & Ruback, 1992; Hillman & Dalziel, 2003; Meglio & Risberg, 2011; Roll, 1986; Villiers, Naiker & van Staden, 2011; Yermack, 1996; Zahra & Pearce, 1989). This study aims to provide new insights into the current knowledge of the role of board structure in an M&A transaction. In addition, the period chosen for this research could also provide new insights because it is in the aftermath of a big (financial) crisis.

The remainder of this study is structured as follows. The next chapter describes a literature review about prior researches of the variables used, which eventually will result in the hypothesis. Chapter 3 describes the research methodology. This chapter will be more elaborated on the data collection process and sample determination. Chapter 4 elaborates on the results of the empirical analyses. Finally, chapter 5 concludes with a conclusion, discussion and limitations of this study.

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Page | 7 2. Literature review

This paper explicitly examines the relation between board structures of US firms and their post M&A performance. Prior research suggests that there is no single theory that covers all links between the board structure and the performance of a firm (Nicholson & Kiel, 2007; Pettigrew, 1992). Nicholson and Kiel (2007) argue that the relationship between the board of directors and firm performance is too varied and complex to be explained by a single governance theory. Therefore this study will focus on two theories to examine prior literature and for building the research hypotheses. This chapter will proceed as follows, the first paragraphs explains the theories used in this study. The second paragraph explains what Merger and Acquisition (M&A) performance is. Furthermore, this study will explain how other researchers interpret board structure and give a more profound knowledge about the variables used in this research. The last paragraph explains the interactional relation between the board structure variables.

Agency theory

In the 1930s, two researchers, Berle and Means (1932) published an article in which they argued that corporate firms were obligated to separate ownership and control. In this research Berle and Means (1932) also researched the effect of the separation of ownership and control on the firm performance. An important result of this study is that the directors and management, who are the ones that have direct influence on the operational activities, could manage the resources of a firm in their own advantage and not in the benefit of the shareholders or stakeholders. Building further on this suggestion, Jensen and Meckling (1976) brought a new concept: ’the agency theory’. The agency theory is one the most widely used theories that explains the complications that arise between managers and shareholders (Jensen & Meckling, 1976). In summary, the agency theory provides a more in-depth explanation of the complications that arises between owners and managers. The agency theory asserts that an important activity of the board is to monitor the managers on behalf of the shareholders and that effective monitoring could reduce the agency costs (Fama & Jensen, 1983), which eventually could lead to a higher firm performance (Hillman & Dalziel, 2003). The need to monitor managers and align their interests with those of the shareholders refers directly to the theoretical knowledge of the agency theory (Berle & Means, 1932; Fama & Jensen, 1983; Jensen & Meckling, 1976). In other words, managers that are in control should be working towards to realizing maximum return for the

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Page | 8 shareholders. However, this delegation of decision power gives managers the chance to show opportunistic behaviour like investing in projects that would benefit their own wealth more rather than that of the shareholders (Shakir, 2008). The pursue of managers for their own wealth at the expense of the profit maximization for the shareholders is called agency costs. In other words, based on the theoretical underpinning of the above mentioned researches, the agency costs should be lower when a board of directors monitors the actions of managers.

Resource dependency theory

The second theory used in this paper is the resource dependency theory. This theory is employed to examine the link between firms and the essential resources that are needed to maximize profit (Jackling & Johl, 2009). According to the agency theory the board’s function is to monitor the actions of the managers, as where the resource dependency theory highlights the importance of providing resources for the firm. The resource dependency theory refers to the capability of the board to collect resources (Jackling & Johl, 2009). Resources could be seen as both relational and material which are needed to be fully operational for an organization. For example, a political connection could be useful when the participating firm is subject to rapidly changing legal environment. The research of Pfeffer and Salanick (1978) also proposes that a director could bring four additional advantages to the board. These are (i) information and advice, (ii) preferential access to resources, (iii) experience in the markets where the firms want to diversify their portfolio and (iv) legitimacy. A director could have different functions in the board. Based on the resource dependency theory, the composition of the board is dependent on the strategy and needs of the firm.

Furthermore, the resource dependency theory argues the importance of gathering and exploiting the firm’s resources faster than it’s competitors, which could be a fundamental element for success (Pfeffer & Salanick, 1978). Pfeffer and Salanick (1978) also argue that resources could help lowering the dependency of the firm of external contingencies and uncertainties (Sherer & Lee, 2002). This would suggest that the more a board is capable of providing resources for the firm, the better the firm is in reducing its environmental interdependencies and risks. When the board of directors could increase the firm’s independence and lower the firm’s risk, then the board has a better position when making decisions. Prior studies about the board of directors show that the resource dependency theory is a more

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Page | 9 promising view for understanding the boards function compared with the scope of the agency theory (Johnson, Ellstrand, & Daily, 1996; Zahra & Pearce, 1989).

Based on empirical evidence and the agency theory, many researches have come to the same conclusion, namely a board of directors has two main functions: monitoring and advising (Adams & Ferreira, 2007; Linck et al., 2008; Raheja, 2005). So according to the agency theory the board of directors is created to resolve conflicts between shareholders and managers, which eventually will reduce the agency costs. When taking a closer look to the resource dependency theory, the board of directors also has two main functions: monitoring management and providing resources (Hillman & Dalziel, 2003). In other words, according to the resource dependency theory the board of directors is created to monitor the management and to connect the firm with the external world. The similarity here is that both theories describe that an important aspect of the board is the monitoring of the management. However, the essential difference between the two theories is that the agency theory focuses on reducing conflicts between managers and shareholders whereas the resource dependency theory accentuates the role of the board to act as a resource of the firm (Yusoff & Alhaji, 2012).

In conclusion, this study proposes that the agency theory and resource dependency theory are complementary frameworks which provide a deeper understanding of the decision making process by managers. The agency theory suggests that the board of directors consists of agents that act on behalf of the shareholders, whereas the resource dependency theory suggests that the board of directors is seen as a provider of resources for the firm that are necessary in order to make profit. The interpretation of these theories is consistent with prior research (Hillman & Dalziel, 2003; Jackling & Johl, 2009). Understanding both theories is important for this study for it could help by better interpreting the results. In fact, both theories give an alternative view on the board which is useful for building this study.

2.1 M&A Performance

The most important goal of mergers and acquisitions (M&As) is to create shareholder wealth. The scope of the agency theory focuses mainly on shareholder wealth creation (Jensen and Meckling, 1976). Therefore, shortterm abnormal returns (stock prices) around the announcement date of the M&A are the most frequently used proxy for measuring M&A performance in the academic literature (Bruner 2002; Healy, Palepu & Ruback, 1992; King et al., 2004). According

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Page | 10 to Zollo and Meier (2008), researchers should use the term ‘market expectation about firm performance’ when using the stock market prices instead of acquisition performance. It also is important to note that market based measures leave room for managers to influence the financial statements (Hoorn & Hoorn, 2011).

In the study of Haleblian et al. (2009) the researchers came to the conclusion that there is no universal measurement for M&A performance. They encourage other scholars to use different measures as long as the method is justified and appropriate for the study. Therefore, in this study Return on Assets (ROA) will be the proxy to measure M&A performance. This study defines ROA as follows: Net Income divided by Total Assets. Net income is defined as revenue minus the operating cost, depreciations interest and taxes (Hodder, Hopkins & Wahlen, 2006). Net income is an important indicator for the profitability of a firm, which is also used by many investors to determine the future firm performance. ROA is an accounting based measure and is highly depended of the industry. The ROA measures what earnings were generated from the firm’s investments (assets). The ROA gives an indication of how successful managers are in using their assets and converting them into money. Which basically comes down to making good decisions in respect of the firm’s assets.

The reason why this study chooses for an accounting based measure is because the credibility of the financial data. Financial statements are audited by a professional organization and published by the firm (Bruner, 2002). Other positive aspects of accounting based numbers are the data availability and accessibility. US listed firms are obliged to publish a complete set of financial statements at least once a year. However, one could argue that the dataset only existing out of accounting- or market-based numbers contains limited information. When a study is only focusing on what is measurable, one might ignore other aspects that could affect the M&A performance of a firm (Meglio & Risberg, 2011). But this study only focuses on the quantitative data, non-financial data goes beyond the scope of this research.

Because this study has an accounting background it is appropriate to use ROA as a proxy for M&A performance. Furthermore, this study aims to focus on a longer term measure and an accounting based measure allows us to assess the actual implementation of the merger or acquisition (Haleblian et al., 2009). However, the weakness of an accounting based measure is that the numbers are only looking backward. Also firms could change their reporting practices either obliged by the government or self-interest (Bruner, 2002). This could make the data

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non-Page | 11 comparable over different years and give mixed results. These aspects should be taken into account when interpreting the results (Bruner, 2002; Zollo & Meier, 2008).

In conclusion, this study will use ROA to measure M&A performance because the numbers in the financial statements are audited and contribute to the credibility of the results in this study. Furthermore, ROA is marked as an accounting based measure, which fits the background of this study. Finally, ROA is a measure which could be used over multiple years and allows this study to examine the implementation of the M&A.

2.2 Board structure

This study explicitly focuses on board structure but this expression is too wide and could be interpreted in different ways. Therefore, in the following paragraph a couple of studies will be mentioned to narrow the definition of board structure and eventually come to a set of variables to measure the board structure.

The research of Linck, Netter and Yang (2008) focuses on the determinants of the board structure of a firm. Three board characteristics were used in their research: board size, board independence and CEO duality. The results of their research show that there is a clear difference in the determinants of board structure between small and large firms. A similar research was performed by Arslan, Karan and Eksi (2010). In their study they also focused on the relationship between board structure and corporate performance. To proxy board structure they used four measures: board ownership, board independence, board size and CEO duality. The variables used in the research of Arslan et al. (2010) are comparable with the research of Linck et al. (2008).

In addition, Valeas, Nikos and Elana Theodorou (1998) performed a similar research but used different proxies to measure their variables. In their research they solely focused on the listed firms in the United Kingdom and examined the relationship between board structure and firm performance. To measure board structure they used the number of non-executive board members, director stock ownership and the selection of an independent board chairman. The results of their research impose that implementing the same governance structure in all firms will lead to monitoring that is redundant and costly (Theodorou et al., 1998). In other words, every governance structure should be designed based on the different needs and agency costs of the firm.

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Page | 12 In summary, the above studies indicate that the theoretical definition of board structure is consistent. The variables used by the researchers to measure board structure are comparable (Arslan et al., 2010; Linck et al., 2008). For that reason, this study will use board size, board independence and CEO duality as variables to measure board structure. However, this study argues that one variable is missing for measuring board structure. Prior literature does not often include financial expertise in the board as a variable, so therefore this study sees an opportunity for extending literature about the influence of financial expertise on M&A performance. Therefore, this study will add financial expertise as a variable to measure board structure. Paragraph 2.6 gives a more academic substantiation of financial expertise in the board and the effect of this variable on M&A performance.

2.3 Board size

One of the first researches performed on board size is conducted by Fama and Jensen (1983). They argue about the way the design of the corporate governance of a firm is dependent on the complexity and size. Inevitable is that the more complex a firm, the larger the size of the board is. In addition, Lehn, Patro and Zhao (2005) and Coles, Daniel, and Naveen (2007) argue that the size of a board is dependent on the strategy of a firm. This implies that when a firm is exploring new product lines or is growing into a new geographical area the board would search for more board members with specialized knowledge to guide the firm. This suggestion is also in line with the resource dependency theory, which states that the board is seen as a resource. In other words, when a firm is engaged in an M&A transaction, the firm would seek for more or other board members with specialized knowledge.

Lipton and Lorsch (1992) performed a research on the number of board members. They proposed that the board size should be limited to a maximum of ten directors. Preferably the board size consists of eight to nine directors. This is due to the fact that there comes a point when a larger board suffers from board coordination and communication (Lipton & Lorsch, 1992). The preferable number of directors in the research of Lipton and Lorsch (1992) is contradictory to the research of Jensen (1993). The study of Jensen (1993) argues that boards with more than seven members are less likely to function effectively. Jensen (1993) gives the same suggestion as Lipton and Lorsch (1992) which is that a large board has difficulties with communicating and decision making. This suggestion is consistent with the research of Hermalin and Weisbach

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Page | 13 (2003), the results of their research show that an increase in the board size has a negative impact on the decision making process. When the board consists of too many directors, it could be difficult to reach consensus. The hassle that comes with the coordination of the meetings and time consuming communication outweighs the advantages of having a large board (Jensen, 1993). In addition, a small board allows the directors to get to know each other on a personal level (Lipton & Lorsch, 1992). This would suggest that the discussions will become of a higher quality and eventually lead to better decision making.

However, the same researchers conclude that a small group of directors could lack the (financial) expert knowledge which ought to be useful in the decision making process. This statement is also in line with the resource dependency theory (Jackling & Johl, 2009). The resource dependency theory considers the board as a resource, so when the board is smaller, the chance is higher that it lacks expert knowledge to make the right decisions. Therefore, the board composition should be aligned with the strategy of the firm. However, board composition goes beyond the scope of this study. In addition, Lipton and Lorsch (1992) argue that when a small group is mainly engaging in the decision making process, this would leave the board of directors with less time to monitor the management. So if we follow the agency theory and the board has less time to monitor the management, this would suggest that the agency costs will increase and eventually will lower the profit of an organization. Which is consistent with Jensen (1993), who argues that when a board is not functioning effectively, the agency costs will increase and lower the firm performance.

Contrary results are shown in the research of Shakir (2008). He argues that the markets prefer a smaller board. This would avoid information asymmetry between directors and provides a basis for strong leadership in the firm (Shakir, 2008). However, the findings of Shakir are based on 81 firms from the Kuala Lumper Stock Exchange sample. So the results are based on a very small sample and possibly not applicable on the US/western market. In addition, the research of Yermack (1996) also advocates that the markets prefer a smaller board. He suggests that the underlying cause for this is that smaller boards are more likely to dismiss a CEO after a period of low performance of the firm. Thus motivating the CEO to work harder and this is perceived as positive by the market (Yermack, 1996).

Many researchers measured board size as the number of directors participating in the board (Arslan et al., 2010; Bhagat & Black, 1999; Brewer et al., 2010; Coles et al., 2007; Lehn et

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Page | 14 al., 2005; Lipton & Lorsch, 1992; Shakir, 2008; Yermack, 1996). This study will follow the same measurement method for the board size, as where the number of directors participating in the board is representing board size.

In summary, most researches conducted on board size suggest that firm performance decreases as the number of directors in a board increases (Eisenberg, Sundgren & Wells 1998; Hermalin & Weisbach, 2003; Jensen, 1993; Lipton & Lorsch, 1992; Shakir, 2008; Wu, et al., 2009; Yermack, 1996). As Jensen (1993) concludes, a board with too many directors is less likely to function effectively. The probable underlying cause for this is that in reality communication with a large group of people will encounter difficulties, thus smaller boards may be more effective decision makers (Yermack, 1996). Based on the above literature, the following hypothesis is proposed, which is contrary to the agency theory and resource dependency theory:

H1: The number of directors is negatively related to M&A performance

2.4 Board independence

Prior studies argue that the board of directors should act as an essential internal governance mechanism to protect the interests of shareholders (Fama, 1980; Fama & Jensen, 1983). Particularly independent directors are seen as objective professionals who are best in representing the interests of the shareholders (Brewer et al., 2010; Wu et al., 2009). But first of all it is important to note which definition is linked to an independent director. Where Lipton and Lorsch (1992) define dependent directors, they also define independent directors as follows: “an independent director is any director that has no connection with the company, either as management or substantial customer/supplier”. The definition of dependent directors is the exact opposite. However, this study does not only focus on a single (independent) director but also on the board of directors as a whole. Therefore, an independent board is defined as follows: “when the majority (>50%) of the board exists of independent directors, then we label this board as an independent board”. This definition is in line with that of Bhagat and Black (1999).

One of the most recent studies performed on board independence is done by Wu et al. (2009). The results of their research show that board independence is positively associated with firm performance. In other words, this finding suggests that the more independent a board is, the

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Page | 15 higher the firm performance should be. This is opposite to the research of Arslan et al. (2010). In their research, the results show that board independence has no significant impact on a firm’s accounting performance. The results of Arslan et al. (2010) are in line with the outcome of Bhagat and Black (1999). These researchers also conclude that there is no convincing evidence that board independence will improve the accounting performance of a firm. The explanation they give for this conclusion is that independent directors are ignorant about what is happening within the firm and an independent director will make quicker decisions in a crisis situation. In contrast, dependent directors are highly knowledgeable about the operations of a firm and could have a distorted view because they have human and financial capital1

linked to the firm (Bhagat & Black, 1999). In other words, independent directors could make wrong decisions because of their information asymmetry relative to dependent directors. But dependent directors could make wrong decisions because they are influenced by personal feelings and connections with the firm and the employees. Hence, an optimal board would consist of a mix of dependent and independent directors who bring different skills and knowledge into the firm (Bhagat & Black, 1999).

A study performed around the same time by Klein (1998) shows that dependent directors could be of high value within the board. Yet the trend in reality displays that US listed firms are replacing their dependent directors for independent directors (Klein, 1998). Klein assigns this movement mainly to external groups like the government or regulators that support independent boards and put pressure on firms to replace their dependent directors. A more recent study from Shakir (2008) shows that dependent directors are better decision makers because they have access to all relevant information concerning the decision they have to make. In other words, the effectiveness of the board’s decision making process may rise with more dependent directors which eventually could lead to a higher firm performance.

On the other hand, independent directors are better in monitoring activities (Fama & Jensen, 1983; Jensen & Meckling, 1976; Shleifer & Vishny, 1997) and if we follow the line of reasoning from the agency theory, monitoring of the management should lower the agency costs and eventually should lead to a higher firm performance. That board independence has a positive influence on firm performance is shown by Brewer et al. (2010). They performed a research

1_{Bourdieu, P. (2011). In his research Bourdieu introduced a couple of influential concepts. Among these concepts}

the human capital stands for the manpower needed for the firm and the financial capital represents the access someone has to financial resources.

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Page | 16 where they examined all the bank mergers over the period 1990 – 2004. The results of their research show a positive relationship between the acquirees’ independence of the board and the merger prices. A possible reason given by Brewer et al. (2010) for this relationship is that dependent top managers are more likely to act selfish and choose for personal benefits, like job security or a bonus, rather than potential takeover gains for the firm. The positive relationship between board independence and firm performance is also found by Villiers, Naiker and Staden (2011). They found a higher environmental performance when the board independence of a firm is higher. The same positive results of board independence are found by Arslan et al. (2010) on the stock market’s reactions. The investors perceive board independence as positive in normal as well as in crisis periods (Arslan et al., 2010). However, these results apply only on the stock market’s reactions. These findings also confirm the suggestion that independent directors are better in protecting the interests of the shareholders than dependent directors (Fama & Jensen, 1983; Jensen & Meckling, 1976; Shleifer & Vishny, 1997).

In summary, many empirical researches have shown contradictory evidence for a positive and negative relationship between board independence and firm performance. However, this study follows the suggestion that independent directors are better in monitoring the management, because this study thinks that a personal connection between director and employees could distort the objectivity of the monitor. And therefore we follow the agency theory and the findings of the above described literature (Brewer et al., 2010; Villiers et al., 2011; Wu et al., 2009). This study has come to the following hypothesis:

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Page | 17 2.5 CEO duality

The third board characteristic in this study is CEO duality. Krause, Semadeni and Cannella, (2014) define CEO duality as follows: “The practice of an individual serving as both CEO and board chair”. This study will apprehend this definition for further research. In the past years, regulators and government are advocating the separation of the title from CEO and chairman. This is consistent with the study of Pi and Timme, (1993), who conclude that combining these titles could be a sub optimal leadership structure. Furthermore, their results show a higher return on assets and lower costs when the titles are separated. However, their research also shows that the best leadership structure could vary across firms and industries and the results of Pi and Timme (1993) are only applicable in an industry specific setting. This suggests that separating the CEO and chairman function maybe not as effective as visualized in the literature. Contrary to the above research, Brickley, Coles and Jarrel (1995) found little evidence that separation of the CEO and chairman function leads to a higher firm performance. But they agree on the point of Pi and Timme (1993) that leadership structure is not theoretical determined and that it is industry/firm specific. According to Brickley et al. (1995), potential agency costs and information costs could be overlooked when the CEO and chairman title are separated. Therefore, when a firm decides to separate the title of CEO and chairman, it should ensure that the agency and information costs are low for its industry/firm.

According to the agency theory, in which the role of CEO and chairman is fulfilled by the same person, thus acting as monitor and corporate decision maker, it could reduce the potential of the board structure to minimize the agency costs. Which eventually could lead to a decrease in the corporate financial performance (Jensen & Meckling, 1976; Fama & Jensen, 1983). This theoretical basis for the relationship between CEO duality and corporate financial performance is in line with the research of Wu et al. (2009). The results of their study show a significant and negative relationship between CEO duality and firm performance. This outcome supports the reasoning of the agency theory and suggests that the board is a less objective monitor when the CEO and chairman are the same person. In an older but widely used study among scholars, the same outcome is urged (Daliy & Dalton 1993; Dahya, Lonie & Power, 1996). The results of these studies suggest that firms with an independent leader consistently outperform the firms where CEO duality is applied (Rechner & Dalton, 1991). Thus, the execution of both roles,

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Page | 18 where the CEO is grading his own homework, is perceived as an inefficient manner of structuring the board (Theodorou et al., 1998).

However, there is not only a negative side of CEO duality. In the research of Brickley et al. (1995) is argued that separation of the CEO and chairman function is only recommendable when the agency costs and especially the information costs are low. These researchers argue that the benefits of separating the titles is not solely the reason for a better corporate performance. In other words, information asymmetry and potential agency costs between the board and the ones who have the power to make corporate decisions are important determinants for CEO duality. Furthermore, one could also argue that CEO duality provides an excellent basis for a strong leadership position (Finkelstein & D’aveni, 1994). However, additional analyses in the study of Boyd (1995) indicate that CEO duality could have a positive effect under certain circumstances. In the research of Elsayed (2007), CEO duality shows the most significant results when corporate performance is low. These findings suggest that the market prefers strong leadership when a firm encounters a difficult period. Furthermore, the agency theory suggests that CEO duality infers the board’s ability to monitor the management, but it is important to note that the board and management not always have different interests.

In summary, based on the above described literature there is no absolute answer to the question whether CEO duality is positively or negatively related to corporate financial performance. To structure a board where the CEO also fulfils the role of chairman could be beneficial in certain circumstances but in other situations jeopardise the corporate firm performance. One could argue that CEO duality provides an excellent basis for strong leadership and a lower information asymmetry, which enables the CEO to make better corporate decisions which eventually will lead to a higher firm performance. However, this study argues that these certain circumstances are exceptional and dependent on more important determinants. Furthermore, this study follows the line of reasoning of the agency theory, where a CEO needs an objective and independent monitor to operate in the best interests of the shareholders. Therefore, this study comes to the following hypothesis:

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Page | 19 2.6 Financial expertise

The Sarbanes-Oxley Act of 2002 (SOx) is a US law that sets new standards and legislation for US listed firms. This set of standards was a reaction on the major corporate and accounting scandals including WorldCom and Enron. This set of standards should restore shareholder’s and investor’s confidence in corporate disclosure by improving the accuracy and reliability of the financial statements (SEC, 2003). One of the most discussed requirements of the SOx is that firms need to disclose to the Security and Exchange Commission (SEC) whether they have a financial expert in the audit committee. The US Congress recognized the importance of having a financial expert on the board of directors by passing the SOx legislation.

This study agrees with the Congress and emphasizes the importance for a firm of having access to financial expertise in the board. The SEC used a dubitable definition for a financial expert in the draft paper for implementing the SOx (SEC, 2003). According to the SOx legislation, an individual should, in accordance with the following five points qualify as a financial expert when a person has (i) reasonable knowledge of the generally accepted accounting principles, (ii) the ability to assess the accounting principles on estimates like accruals or reserves, (iii) experience in preparing, auditing, analysing or evaluating financial statements that represent the level of complexity that could be expected when a person is engaging in the current function, (iv) understanding of internal controls and procedures for financial reporting and (v) understanding of audit committees functions (SEC, 2003). An individual can acquire these abilities by work experience or by education. In the study of DeFond, Hann and Hu (2005) the researchers made a simple difference between accounting and non-accounting financial experts. Contrary to the research of Defond et al. (2005), in this study we will focus on the whole board and not on what kind of financial expertise an individual possesses. Therefore, this study determines the level of financial expertise based on the number of financial experts in the board relative to the total board size as where financial expertise is determined according to the guidelines of the SEC.

The research of Aier, Comprix, Gunlock and Lee (2005) found a negative relation between the financial education (MBA/CPA) of the CFO and accounting restatements. Also the same negative relation is found between the work experience of the CFO and accounting restatements. The longer the work experience, the higher the negative relationship with the accounting restatements. In other words, the higher the financial education and work experience

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Page | 20 of a CFO, the more accurate and reliable the financial statements of a firm (Aier et al., 2005). This suggestion is confirmed by the research of Defond et al. (2005). Their results show a difference between accounting and non-accounting financial expertise. The results suggest a positive market reaction when an accounting financial expert is added to the audit committee. The market perceived this as a positive development because an accounting expert increases the ability to ensure high quality financial reports (Defond et al., 2005). This same significant positive relationship between high quality interim disclosures and adding financial expertise to the audit committee is found in the research of Mangena and Pike (2005). This positive relation suggests that financial expertise is an important audit committee characteristic and an appropriate corporate governance characteristic. Furthermore, adding financial expertise to the audit committee improves the monitoring effectiveness of the financial reporting process (Mangena & Pike, 2005). Altogether, the above studies indicate that financial expertise in the board could improve the quality of the financial reporting process and is perceived as positive by the market.

However, the research of Güner, Malmendier, and Tate (2008) found opposite results. The results of their research show that specific policies like financing, investment and compensation do not improve when adding a financial expert to the board. Therefore, the researchers suggest that increasing the number of financial experts in the board should be handled with caution and the firm should make a trade-off between the potential improvements in the monitoring ability of the board and losses in advisory when a non-financial director is replaced by a financial expert (Güner et al., 2008). A negative relation between financial expertise and stock performance is also found in the research of Minton, Taillard and Williamson (2011). To explain the underlying cause of the financial crisis they investigated the behaviour of the banks. They expected financial expertise to lower the risk taking behaviour; however, the opposite was shown in the results. The risk taking behaviour positively related to the financial expertise of the directors in the board, in fact the stock performance even worsened with high financial expertise among their directors in the board in comparison with that of firms with a lower ratio of financial experts participating in the board (Minton et al., 2011). The explanation given by Minton et al. (2011) for this result is that financial experts are more likely to take risks because of their familiarity with the financial instruments of the bank. However, this last explanation goes beyond the scope of their research and has no scientific substantiation.

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Page | 21 So adding financial expertise to the board could indicate for a stronger monitor mechanism in order to reduce the agency costs in a firm (Defond et al., 2005), which is also consistent with the monitoring aspect advocated by the agency theory (Jensen & Meckling, 1976; Jensen, 1986). Also the resource dependency theory suggests that financial expertise improves the management monitoring activities because it reduces the information asymmetry and the agency costs (Fama and Jensen, 1983; Gani and Jermias, 2006), which eventually will improve the financial performance of a firm. Furthermore, adding a financial expert to the board of directors allows them to understand the internal working of the accounting controls (Carpenter and Westphal, 2001).

In summary, prior research shows contrary results of adding financial expertise to the board. The positive results suggest that financial expertise could improve the financial reports of a firm (Aier et al., 2005; Mangena & Pike, 2005), which is perceived as positive by the market (Defond et al., 2005). However, the negative results show an increase in the risk taking behaviour when directors with financial expertise are added to the board (Minton et al., 2011). This increase in risk taking behaviour could harm the firm on the long term, which is seen in the recent financial crisis. Firms should design their corporate governance structure which is best suited for their firm and industry. The board should be characterized with at least one financial expert. The empirical evidence and legislation in the US also emphasizes the importance of financial expertise in the board. Therefore, this study agrees with policy makers and standard setters of the US. Substantiated by the above researches this study comes to the following hypothesis:

H4: Financial experts in the board are positively related to M&A performance

2.7 Relation between variables

This part of the study is specifically devoted to the interaction between the independent variables of board structure: board size, board independence, CEO duality and financial expertise. The interaction between the variables is an important aspect to note and should be taken into account when interpreting the results.

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Page | 22 Board size

Board size is one of the most commonly used variables to measure board structure. However, when the board size increases this study expects that there is an increased chance that there will be more independent directors. Because the more complex a firm is, the more monitors are needed in the board (Fama & Jensen, 1983). According to Brewer et al. (2010) and Wu et al. (2009) independent directors are better monitors. Therefore, this study expects a positive relationship between the increase in board size and an independent board. In addition, when the board size increases it is less likely that the same person serves as the CEO as well as the chairman of the board. Hence, the execution of both roles, where the CEO is grading his own homework, is perceived as an inefficient manner of structuring the board (Theodorou et al., 1998). The last interaction within the board characteristics is that when the board size increases there is also a higher chance that more financial experts are participating in the board. It is a logical assumption to make that when the board size increases, there is an increased possibility that there will be more financial experts participating in the board. Especially since the implementation of the SOx law in 2002, the need for financial experts in the board is more advocated than ever.

In contrast, when the board size decreases this study expects that the number of independent directors in the board will also decrease. Because when the firm has a smaller board, the firm will use dependent directors. According to Shakir (2008) dependent directors are better decision makers because they have access to all relevant information concerning the decision they have to make. Furthermore, when the board size decreases the chances of CEO duality will increase. Because the less people are in the board, the higher the chance that the same person will be both CEO and chairman. In addition, when the firm is facing difficult times, CEO duality is desirable because strong leadership is perceived as positive by the markets (Finkelstein & D’aveni, 1994). Finally, when board size decreases this study expects the number of financial experts to decrease as well, because the composition of the board should be varied and one financial expert should be enough in a small board (SEC, 2003).

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Page | 23 Board independence

Board independence is also one of the most used variables to measure board structure. Chen and Al-Najjar (2012) found that board size and board independence has no impact on each other. Board size is mainly driven by firm complexity and board independence is mainly driven by regulation (Chen & Al-Najjar, 2012). Therefore, this study expects that board independence has no significant influence on board size. No evidence could be found of the effect of board independence on CEO duality. Some evidence has been found of the opposite relation, the effect of CEO duality on board independence, but this will be discussed in the following paragraph. Therefore, board independence has no effect on CEO duality. The last interaction is between board independence and financial expertise. There has been evidence found that independent directors with financial expertise are related to lower accounting restatements in high growth firms (Chen, Elder & Hsieh, 2011). This would suggest that the financial expertise of independent directors is important for a good financial reporting process. However, this is only applicable on high growth firms. In addition, according to the research of Minton et al. (2011) the results show that financial expertise among independent directors is negatively related to the firm performance. This would suggest that a firm with independent financial experts shows more risk taking behaviour and is negatively perceived by the market. With this knowledge, this study expects that the board independence would have a negative impact on the number of financial experts in the board.

CEO duality

The effect of both serving as CEO and chairman of the board could have a significant impact on the board size. This study expects that the CEO prefers a smaller board because it is easier to convince less people to support his decisions (Ramdani and Witteloostuijn, 2010). The results show a moderating negative effect on board size when there is CEO duality in the firm. When there is no CEO duality in the board, this study expects more directors to participate in the board because the CEO and chairman already count for two and there is also need for more monitors within the board. Therefore, this study expects the number of directors to increase when there is no CEO duality. The consequence of the need for more monitors is that the directors participating in the board will be independent directors. Independent directors are better monitors (Fama & Jensen, 1983; Jensen & Meckling, 1976; Shleifer & Vishny, 1997) and without CEO

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Page | 24 duality there is a higher need for monitoring. Therefore, this study expects a higher chance for an independent board when there is no CEO duality (Bliss, 2011). The results in his research show that higher audit quality is demanded by an independent board however, this is only present when there is no CEO duality. This would suggest that CEO duality constrains board independence. The recommendations of Bliss (2011) are against CEO duality because a dominant CEO could weaken the board independence. Furthermore, there is no evidence found that CEO duality would have a significant impact on the financial expertise of directors in the board.

Financial expertise

The last variable used in this study to measure board structure is financial expertise among the directors. The research of Yunos, Ahmad and Sulaiman (2014) proves that independent directors as well as financial experts have no influence on the board size, CEO duality and conservatism. This outcome would suggest that financial expertise has no direct influence on the other variables. However, the research of Albring, Robinson and Robinson (2014) found a weak relation between financial expertise and improvement of the auditor’s independence. This would suggest that financial expertise does have an impact on the independence. However, only the independence of the auditor improves and not that of the board of directors (Albring et al., 2014). Therefore, the outcome of their research is not applicable for this study. Furthermore, this study did not find evidence for any interaction between financial expertise and the other variables. The interaction between financial expertise and board size, board independence and CEO duality seems like a gap in the literature. This study does not expect financial expertise to have any significant influence on the other variables. The amount of financial experts in the board seems more dependent on the strategy and industry of a firm (Aier et al., 2005; Mangena & Pike, 2005). In conclusion, the above mentioned cohesion between variables could positively or negatively impact the results and should be tested for. When there is a strong correlation between two independent variables, they almost explain the same variance in the dependent variable. The correlation and other assumptions required for a regression will be tested in paragraph 4.1.

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Page | 25 3. Research methodology

This chapter will discuss the data sample which will be used in this study. As well as the variables which will be tested and the overall research methodology. This study will use a quantitative database research to answer the research question of this thesis.

3.1 Variables

The following paragraphs will discuss the variables which will be used in the analyses of this study. First of all the main dependent variable will be discussed, followed by the independent and control variables.

M&A performance - The main dependent variable in this study is M&A performance

which is measured as Return on Assets. The study of Haleblian et al. (2009) concluded that there is no universal measure for M&A performance and they encourage other scholars to use different measures as long as the method is justified and appropriate for the research. Therefore, in this study the measure Return on Assets (ROA) will be the proxy to measure M&A performance. The formula for ROA is Net Income divided by Total Assets. Net income is defined as revenue minus the operating cost, depreciations, interest and taxes (Hodder, Hopkins & Wahlen, 2006). The ROA gives an indication of how successful managers are in using their assets and converting them into money. Which basically comes down to making good decisions in respect of the firm’s assets.

Board size - The first independent variable which is used to measure board structure is

board size. Many researchers measured board size as the number of directors participating in the board (Arslan et al., 2010; Bhagat & Black, 1999; Brewer et al., 2010; Coles et al., 2007; Lehn et al., 2005; Lipton & Lorsch, 1992; Shakir, 2008; Yermack, 1996). This study will follow the same measurement method for board size, where the number of directors participating in the board is representing the board size.

Board independence - The second independent variable used to measure board structure

is the percentage of independent board members within the board. Many researches have shown that independent directors are better in protecting shareholder’s value (Fama & Jensen, 1983; Jensen & Meckling, 1976; Shleifer & Vishny, 1997). Therefore, this study uses board independence as a variable to measure board structure. The database ISS provides an option

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Page | 26 where it indicates if the director is an independent, affiliated or inside director. Firstly, all the independent directors are counted. This determines the number of independent directors in the board. Secondly, the total independent board members are divided by the total board size to calculate the percentage for the actual data measurement in the regression.

CEO duality - The third independent variable for measuring board structure is CEO

duality. The definition of CEO duality is: “The practice of an individual serving as both CEO and board chair” (Krause et al., 2014). This definition is apprehended for this study. Also a dummy is created for this variable, where 1 stands for CEO duality and 0 stands for no CEO duality in the firm.

Financial expertise - The fourth and last independent variable used in this study is

financial expertise. After implementation of the SOx legislation, the importance of financial expertise is recognized in the corporate world. Financial expertise is defined in paragraph 2.6 by the SEC (2003) and this study follows this definition for recognizing financial experts. The ISS database has an option where it indicates if the director is a financial expert according the definition given by the SEC. Therefore, the data obtained from the ISS database regarding the financial expertise scaled per director can be used for this study. Firstly, all financial experts are counted and this determined the number of financial experts in the board. Secondly, the total of financial experts is divided by the total board size to calculate a percentage for actual data measurement in the regression.

3.2 Control variables

This paragraph is devoted to examination of the control variables. Furthermore, this paragraph will explain how these variables are defined and how they are used in previous researches. This study uses three control variables which are considered important for the results.

Firm size - The first control variable used in this research is firm size. The research of

Moeller, Schlingemann and Stulz (2004) shows strong evidence that the size of a firm has significant effect on the acquisition announcement returns. These researchers argue that small firms experience a small gain in dollar return and large firms a large loss in dollar return when engaging in an acquisition. The explanation given by Moeller et al. (2004) is that the acquiring firms simply overpay their targets (Roll, 1986). Furthermore, in accordance with other empirical studies firm size is defined as the mathematical log of the total assets value (Hall, 1986; Hoorn &

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Page | 27 Hoorn, 2011; Masulis, Wang and Xie, 2007). The mathematical log is used to distribute the scale of the total assets more fairly (Hall, 1986).

Liability-Asset ratio - The second control variable used in this study is the liability-asset

ratio. The research of Kaplan, Reishus and Vafeas (1991) shows that corporate debt has a significant positive impact on the firm’s performance. In addition, other researches show that an optimal use of liability-asset management could improve the firm’s performance (Gulpinar & Pachamanova, 2013; Kouwenberg, 2001). Sommer (1996) defined the liability-asset ratio as follows: “Total Liabilities divided by Total Assets times 100%”. This study follows this definition for calculation of the ratio.

Free Cash Flow - The third and last control variable for this study is free cash flow. Free

cash flow is defined by Dechow and Ge (2006) as follows: “Cash flow operations plus cash flow from investing activities”. Free cash flow represents the impact of money spent on capitalized assets as other investments on the balance sheet (Dechow & Ge, 2006). In other words, free cash flow is better suited as control variable than earnings. The reason for this is that earnings includes capital charges such as depreciation and amortization which are ignored in cash flow from operations (Hanlon & Shevlin, 2002). However, Jensen (1986) states that managers with high free cash flows will engage in value destroying M&A deals. This should be taken into account when interpreting the results. Free cash flow is scaled by the total assets at the end of that year.

Table 1 - Description of the variables used in the model Dependent variable Description

M&A performance ROA, Net Income divided by Total Assets of current year Independent variable

Board size The number of directors in the board of current year

Board independence The percentage of independent directors in the board of current year CEO duality Dummy which indicates that an individual serves both as CEO and

chairman in current year

Financial expertise The percentage of financial experts in the board of current year Control variable

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Page | 28 Liability-asset ratio Total liabilities divided by Total assets times 100%

Free cash flow Cash flow operations plus cash flow from investing activities scaled by the total assets of current year

3.3 Sample

For examining the hypotheses stated in this study a sample had to be selected. For connecting and identifying purposes across multiple databases, this study used CUSIPs and TICKERs codes because these codes are used most widely. In the study of Haleblian et al. (2009), the researchers try to encourage other scholars to focus their future research on identifying potential corporate governance aspects which are important in post M&A performance. By exploring this new academic area, this study responds to the call for future research in corporate governance and M&A performance. Therefore, this study will explicitly focus on M&A active firms from the US and files for the years 2010 - 2013. This period was chosen because it is in the aftermath of the recent financial crisis. M&A activity has not been on such a low point in history, which is typical in crises (KPMG, 2011). However, after a crisis firms are more likely to engage in a merger or acquisition because it is a popular strategy for managers to expand or to innovate their business (Haleblian et al., 2009).

The independent variables Board size, Board independence, CEO duality and Financial expertise are collected from the Wharton Research Data Services (WRDS) database in ISS formerly RiskMetrics annual files for the years 2010 – 2013. The information about M&A targets or acquirer is collected from the Thomson ONE formerly SDC Platinum database. The control variables FirmSize, FreeCashFlow and Liability-Asset ratio are collected from the Compustat database.

The dataset used in this study was collected and processed as follows. First was started with collecting the board size from the ISS database. The dataset now consisted of 6.920 records. The firms that did not have any data available about the board were removed from the sample. This has led to a dataset consisting of 5.040 records. The next step was to collect the data of board independence. For this step the TICKERs of the board size were used to determine if the director was independent. A dummy was created were 1 counted as independent and 0 for not independent. After creating the dummy, all the ones were counted which determined how many independent directors are participating in the board. When the table was merged and completed,

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Page | 29 all blanks were removed which left a database of 5.000 records. The next variable was CEO duality. First a dummy was created to determine if there was CEO duality. 1 indicated that there is CEO duality and 0 indicated that there is no CEO duality. After this step, the dataset still consisted of 5.000 unique records. The last independent variable was FinancialExpertise. For this variable first a dummy was created whereby 1 indicated that a director was a financial expert and 0 indicates that a director was not a financial expert. After this step all the ones were summed and showed how much financial experts were participating in the board. After this step the database still consisted out of 5.000 unique records.

The next step was to determine which firm did a merger or acquisition in the period from 2010 – 2013. Previous research showed that corporate governance as well as firm characteristics for financial and utility industries is different from other industries (Berger, Ofek and Yermack, 1997). So the SIC codes from 6000 – 6999 financial and 4900 – 4999 were excluded from the sample. Furthermore, both acquirer and target must be located in the USA and the date effective of the merger or acquisition had to lie between 01/01/2010 – 12/31/2013. Below a simple overview of the selection steps:

Table 2 – Overview of selection step M&A deals

Selection step: Resulting # deals

Date Effective/Unconditional (01/01/2010 – 12/31/2013) 128.179 Select Acquirer without SIC code 6000 – 6999 and 4900 - 4999 66.696 Select Targets without SIC code 6000 – 6999 and 4900 - 4999 62.605

Acquirer Nation (USA) 18.463

Target Nation (USA) 14.868

TICKER 81.350

The complete list of firms that did a merger or acquisition consisted out of 81.350 unique TICKERs. After removing the blanks and merging it with the independent variable dataset the new sample consisted of 1.584 unique records.

For collecting the following variables the database Compustat North America was used. All data came from the fundamentals annual list. Compustat does not use TICKERs but CUSIPs codes, so for collecting, the ROA 396 TICKERs (1584 records/4 years) were converted to CUSIP codes. The next control variable was Firm size, were the log of the total assets was taken

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Page | 30 and added to the sample. The following control variable was FreeCashFlow. The following three amounts were added up: Operating Activities + Net Cash Flow and Investing Activities + Net Cash Flow. These three amounts determined the free cash flow which is scaled by the total assets of the current year. The last control variable was the liability-asset ratio, which also was collected with the 396 CUSIP codes. After all the data was collected and merged into one Excel sheet there were 1.584 unique records in total. After that a check was done on the dataset and strange amounts were removed from the sample, like firms that had a firm size of zero. The complete dataset consisted of 1.532 unique records. Last step was checking for outliers, first the upper and lower fence was determined by calculating the quartile 1 and quartile 3 and did 1,5 times the interquartile range (IQR). This was done for every variable except for CEO duality because CEO duality was measured as a dummy which only could be 1 or 0. There is no reason to determine the outliers for this dummy. After determining the outliers, the decision was made to remove all data of a firm if this firm contained one outlier. Outliers are removed from this data sample because these values could have a misleading influence when interpreting the results. After removing every company that contained an outlier, the dataset remained with 808 unique records in total. Below a schematic overview of the sample selection:

Table 3 – Overview of sample construction

Observations

Total observations 6.920

(-) Observations related to board size (1.880)

(-) Observations related to board independence (40)

(-) Observations related to CEO duality 0

(-) Observations related to financial expertise 0

(-) Observations related to M&A (3.416)

(-) Observations related to ROA 0

(-) Observations related to firm size 0

(-) Observations related to free cash flow 0

(-) Observations related to liability-asset ratio 0

Final Sample 1.584

(-) Removal of strange amounts (52)

(-) Outliers (724)

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Page | 31 3.4 Empirical model

The following regression model is used to execute the analysis: 𝑀&𝐴 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒_𝑖,𝑡

= 𝛽₀+ 𝛽₁𝐵𝑜𝑎𝑟𝑑𝑆𝑖𝑧𝑒_𝑖,𝑡+ 𝛽₂𝐵𝑜𝑎𝑟𝑑𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑐𝑒_𝑖,𝑡+ 𝛽₃𝐶𝐸𝑂𝐷𝑢𝑎𝑙𝑖𝑡𝑦_𝑖,𝑡 + 𝛽₄𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙𝐸𝑥𝑝𝑒𝑟𝑡𝑖𝑠𝑒_𝑖,𝑡+ 𝛽₆𝐹𝑖𝑟𝑚𝑆𝑖𝑧𝑒_𝑖,𝑡+ 𝛽₇𝐹𝑟𝑒𝑒𝐶𝑎𝑠ℎ𝐹𝑙𝑜𝑤_𝑖,𝑡 + 𝛽₈𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦𝐴𝑠𝑠𝑒𝑡𝑅𝑎𝑡𝑖𝑜_𝑖,𝑡+ 𝜀_𝑖,𝑡

where:

M&A Performance = return on assets; firm i’s net income / total assets in year t BoardSize (-) BoardIndependence (+) CEOduality (-) FinancialExpertise (+) FirmSize FreeCashFlow LiabilityAssetRatio ε = = = = = = = =

firm i’s reported number of directors in year t

firm i’s percentage of independent directors in the board in year t firm i’s where 1 stands for CEO duality and 0 for no CEO duality in year t

firm i’s percentage of financial experts in the board in year t firm i’s natural log of total assets in year t

firm i’s reported cash flow operations plus cash flow from investing in year t scaled by the total assets of current year

firm i’s total liabilities divided by total assets times 100% in year t

The error term in the year t

This regression model is chosen because in this study there are more than three explanatory variables. A multiple linear regression is best suited for every independent variable to value to what extent they are associated with the dependent variable. This multiple linear regression will be used to test all four hypotheses.

Corporate financial decision making : what is the effect of the board structure on M and A performance?

Corporate financial decision making: What is the

effect of the board structure on M&A performance?

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