University of Amsterdam
Amsterdam Business School
Master in International Finance
Master Thesis
The Link between Corporate Governance and
Performance: Evidence from Cash Shells
Utama, Marta
September 2013
1 Table of Contents
1. Introduction 2
2. Prevalence of Cash Shells and Literature Review 5
2.1 Prevalence of Cash Shells 5
2.2 Literature Review 7
2.2.1 Cash Shells, SPACs and Reverse Merger 7
2.2.2 Corporate Governance and Cash Shells 10
3. Hypotheses Development 13
3.1 Board Independence 13
3.2 Board Busyness and Experience 14
3.3 Post-IPO Directors’ Turnover 15
3.4 Issues Surrounding the Research on Board of Directors 16
4. Data and Methodology 17
4.1 Data 17
4.2 Methodology 19
4.3 Descriptive Statistics 22
5. Empirical Results and Robustness Tests 25
5.1 Empirical Results 25
5.2 Robustness Tests 27
6. Conclusion 29
References 31
2 1. Introduction
Cash shells are firms set up by a small number of professional investors or entrepreneurs, characterized by having no operational activity or track record at the time of their IPO (Roosenboom and Vasconcelos, 2009) and mandated to invest and perform acquisition in a relatively short timeframe. Cash shells have grown significantly over the past three decades. Their growing significance on the capital market has enforced financial authority in the US and the UK/Europe to response with strengthened regulation. Their distinctive features continue to exist and evolve in several advance equity markets as investment alternatives for both sophisticated and non-sophisticated investors.
Rodrigues and Stegemoller (2011) indicate that blank check companies in the US sprang up in the 1980s under circumstances associated with “pump” and “dump” scheme. That is a broker “pumps” the stock up through dissemination of false information about a profitable upcoming merger but insiders then “dump” the stock when such merger fails to materialize. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 largely contributed towards shutting down these blank check companies. Since the mid-90s, however, cash shells started growing again. David Nussbaum created the basic of modern cash shell companies that comply with SEC Rule 419 promulgated based on the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (Riemer, 2007). He introduced the Specified Purpose Acquisition Corporation – later known as Special Purpose Acquisition Company (SPAC). The key difference with ordinary cash shell companies is the requirement to deposit the gross proceeds of the offering into an escrow account and invest in liquid government-backed securities. SPAC has its first wave in 2003 up to the period before the financial crisis hit in 2008. SPACs and cash shells have reemerged both in the US and the UK/Europe equity market subsequent to the financial crisis.
Cash shells/SPACs have the aspect of trust from investors to the managers or founders as seen in private equity but have been placed into the public context of exchange market. This hybrid nature that combines both private and public equity characteristics will provide the chance to unveil information that previously has not been available from the secretive world of private equity since they are publicly traded (Rodrigues and Stegemoller, 2011). In addition, the growing existence as an Initial Public Offering (IPO) alternative has been tremendous in the last decade. SPAC reached its peak in 2007 accounted for nearly 25% of total IPO fund raised in the US. In 2011, cash shells accomplished 15% of the total money
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raised from IPO in the UK market. Its new and unique structure motivates us to perform further research to the existing -not-so-abundant- research on this field.
In addition to that, their exceptional pattern of stock return compared to regular public companies makes the study of cash shells is interesting. Cash shells should find a merger deal within 24 months after the IPO. As a result, there are different return patterns in line with their business stage. In general, there are three stages in a cash shells: (i) pre-announcement of the merger plan, (ii) post-merger plan announcement and (iii) post-merger execution. Recent studies show that most of post-merger cash shells’ have significantly underperformed the market in their stock returns. An important research question that this thesis tries to address is what aspects had caused such under-performance. Jenkinson and Sousa (2009) have indicated that the reason may be because most of the merger deals taken are ‘bad’ deals by referencing to the market reaction after the merger announcement. The thesis objectives are trying to answer this question from a corporate governance perspective. Perhaps the acquired firms are not bad deals at all. Probably the ways the merged firms governed as indicated in their board of directors (BOD) attributes leads to a strong negative reaction from the market particularly at their post-merger execution stage.
Despite the underperformance of their returns, the high level of enthusiasm from the market over cash shells/SPACs appears to be consistent in both before and after the financial crisis. As informed earlier, this can be seen from the increasing trend as IPO alternatives in the US market for SPACs and the UK market for cash shells. Although the US market for SPACs is not yet showing post-crisis wave, the size of the proceed in the UK market has multiplied five times over the last five years. This anomaly triggers another key question about cash shells that this thesis tries to discuss: why investors keep buying cash shells although most of their returns will be negative within three years.
This thesis is focusing on cash shells listed in the London Stock Exchange (LSE)1. Analysis of cash shells within the UK market is interesting for the following reasons: (i) Recent evidence of several post-merger cash shell companies in the UK experiencing
1 Since the thesis is focusing on the UK market, the terminology utilized includes cash shell and SPAC form as its subset. The US equity market has regulations that differentiate between cash shell and SPAC. There is no regulation that differentiates between those two subsets in the UK. However, in the recently released changes to the rules of listing, prospectus and disclosures, the UK financial authority had acknowledged them as ‘listed acquisition vehicles”.
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significant negative returns2; (ii) Recent cash shells established in the UK market3 provides fresh case for post-crisis analysis, whereby the latest study had scoped only to the period before the crisis; (iii) Some analyst expected that cash shell/SPAC in the UK market will continue to grow as a result of increasingly constrained capital requirements4.
This study extends previous research by Roosenboom and Vasconcelos (2009) which found a link between agency conflicts on the founder and public investors with the cash shells’ poor performance. Because cash shells do not have operating assets that formed their value, I conjecture that some of its BOD attributes may take part in explaining the negative returns aside from the founder’s agency conflicts. This thesis investigates the relationship of cash shells’ return performance with following BOD attributes: (i) the existence of independent board members; (ii) the busyness and experience of the directors; and (iii) the post-IPO board members’ turnover. With the addition of post-IPO parameter, the significance of pre-IPO and post-IPO BOD attributes in explaining their returns can be observed. This approach has not been taken by previous researchers. The research is performed over 56 active cash shells identified from the combination of data review of LSE listed companies at Main Market and AIM from 2008 to 2012, Cash Shells Directory 2010-2013 published by VitesseMedia plc., LSE publications and other sources. More than two third of identified active cash shells are established from the recent period that is previously not covered by Roosenboom and Vasconcelos (2009) study.
The results show that, for recent UK cash shells, post-IPO board turnover appears to have a strong relationship to the negative returns within 3 years period. The existence of BOD independent members and the busyness and experience of the directors does not seem to affect cash shells returns. This result, in the part of the directors’ experience, is in contrary with the Roosenboom and Vasconcelos (2009) findings that the cash shells created by experienced directors performed significantly worse than the average. These findings provide an alternative view to explain why investors kept buying cash shells created by experienced managers/founders despite its returns performance. Roosenboom and Vasconcelos proposed that there was a time lag from investors in understanding the track record of the managers/founders. They also argue that the consequences of the poor corporate governance of their shells were not visible yet. This puzzling investors’ behavior continues in the recent
2 e.g. Vallar/Bumi plc.: 71%; Vallares/Genel Energy plc.: 10%; Horizon Acquisition/APR Energy plc.: -13.71% (calculated from highest price achieved after admission date to price at the end of April 2013) 3 total amount raised from recently established cash shells is about £4.5 billion during 2008 to 2011 4
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cash shells. From the findings of this thesis, it appears that the market is not solely considering the track record of the managers/founders in their investment decision as the pre-IPO BOD attributes does not relate to return performance. However, the clear reason for this puzzling behavior remains unidentified from this study.
The remainder of the thesis is organized as follows. Section 2 describes the prevalence of cash shells and literature review. Section 3 discusses about hypotheses development. Section 4 presents the data screening, methodology and sample descriptive statistics. Section 5 focuses on the empirical results and robustness tests, and Section 6 concludes.
2. Prevalence of Cash Shells and Literature Review
2.1 Prevalence of Cash Shells
Cash shells are differentiated into two types i.e. ‘clean’ and ‘dirty’. Clean cash shells are newly created shells with no operating assets that raised money through the IPO. They are required to acquire firms in accordance to their mandate. The acquisition is commonly performed through ‘reverse merger’ whereby cash shells will provide floating opportunity, in addition to the fresh capital, to their counterparts. On the other hand, the cash shells founders (and insiders) will recoup share price appreciation as it now has operating assets. Recently established clean shells explained the acquisition target plan in their IPO/Admission documents thoroughly. The IPO/Admission documents commonly included BOD structure that will not change substantially by the time the merger is completed. However, not all clean shells are floating with clear direction since day one. Some are only in the form of investing policy on specific industry sectors. An essential difference from “dirty shells” is that it arose from the liquidation of the activities of an operating company. The UK listing regulation requires them to have new investing policy and execute that investing policy in two years – effectively turned them into a cash shells. It is also important to note that, within this thesis, the terminology of IPO and Admission will be used interchangeably. These terminologies are representing an event where cash shells performing their public offering with or without reverse merger.
On their recent publication, LSE identifies cash shells and SPAC as forms of ‘listed acquisition vehicle’ (LAV). LAV is defined as a publicly-traded buyout company that raises
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money in order to pursue the acquisition of an existing company, at times in a specified industry (LSE publication, 2013). The differences are on the greater flexibility and speed of execution of the cash shells. In the cash shells, there is no requirement to have shareholder vote on the proposed acquisition. The IPO proceed is also no need to be placed in a trust fund. In contrast with the US market, there is no specific market regulation for SPAC in the UK. The latest regulation from UK financial market authority on this matter was about cash shells listing on AIM issued in April 2005. This regulation required cash shells to raise at least £3 million at the time of admission, and enforced listed cash shells with less than this amount in cash to make a transaction before 1 April 2006. This new ruling had a substantial impact to cash shells environment causing some dynamics on the number of floating cash shells at that time.
In addition, UK financial authority, through Financial Services Authority (FSA) body at that time, released various changes to the Listing Rules (LRs), Prospectus Rules (PRs) and Disclosure and Transparency Rules (DTRs) which came into force on 1 October 2012. Among others, the changes now formally acknowledge SPAC and cash shells form as ‘listed acquisition vehicle’ as discussed earlier. The guidance relating to “Reverse Takeover” is now consolidated into the LRs. Further, in LAVs that outsource significant management functions to a third party advisory firm, the principals of the advisory entity will be responsible primarily for any prospectus published by the listed company (PR 5.5). The guidance separately made clear that principals of the advisory entity can fall within the definition of “persons discharge managerial responsibilities” such that they would fall within the ambit of the related DTR requirements to disclose information of their share dealings (DTR 3.1). Thus, LRs is amended to make clear that LAV adopting advisory structure cannot be eligible for a commercial company premium listing. For LAVs falling into this category that are already premium listed, there is a transitional period until 1 January 2014, during which the rule does not apply to them. As a result, LAVs typically seek a standard listing on admission which then commonly seeks to migrate to a premium listing after it makes an acquisition on the basis of the target’s track record. Although premium listings have additional obligations on an issuer over the EU-directive minimum, a premium listing may allow for a lower cost of capital for an issuer and inclusion in the FTSE.
These regulatory revisions are expected to change the typical UK cash shells structure that set up with a purely non-executive board function with an advisory entity (beneficially owned by the sponsors). The concern of the UK financial authority is the fundamental odd
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with the expectations of stakeholders in the UK premium listing regime. In cash shells, the executive functions are not exclusively within the listed vehicle. Various key provisions would only apply to the board of the listed company and would not extend to the “de facto executives” within the advisory company, such as prospectus liability, related party rules and transparency requirements related to remuneration and dealings. With more clarity on the executive functions, public investors at premium listing regime can have more protection whereas cash shells with less protection will be available in lower tier markets.
To understand the growing significance of cash shells in the UK capital market post-2008, we can observe it from the growth of money raised. In a recent publication, LSE reported that the money raised through LAVs has been growing more than 3 times from £600 million in 2008 to £2.2 billion in 2011. The proportion of money raised through LAV has reached 15% from total IPO proceed in 2011. Another report named ‘Cash Shells Directory 2013’ from VitesseMedia plc., a research company specializing on cash shells, has shown a similar trend. Total cash shells held on AIM had grown from £100 million in 2008 to £350 million in 2013. The same increasing pace in the number of listed cash shells is also noted from this report. In addition, the report shows two types of cash shells i.e. heavy resourced and thinly resourced. Heavy resources cash shells can hold money up to billion pounds while thinly resourced shells have various amounts lower than £1 million. LSE had become the leading exchange in listing the LAV on their Main Market and AIM with total money raised of about £ 4.5 billion in the last 5 years, a remarkable figure in the subdued economic environment.
2.2 Literature Review
2.2.1 Cash Shells, SPACs and Reverse Merger
One of the key studies about cash shell is performed by Floros and Sapp (2011). They study 585 trading shell companies in the US over the period 2006 to 2008. The purpose of these shell firms is to find a suitor for a reverse merger agreement. They informed that most shells come into existence either with the sole intent of merging with unidentified single or multiple companies (these are called clean shells), after being created with a business plan that fails to materialize (these are called development stage shells), or after selling their operations and assets following bankruptcy (these are called natural shells). They found that when a reverse merger is taking place cash shells obtained three-month abnormal return of 48.1%. They argue that this exceptional return is compensation for shell stock illiquidity and
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the uncertainty of finding reverse merger suitor. Reverse merger is inherently being part of cash shells and SPACs practice because of the customary life cycle would have gone through this transaction.
Furthermore, other researchers focus on the historical aspects of cash shells and its evolvement in the current market. Rodrigues and Stegemoller (2011) explain in detail how a shell company developed into its today’s modern form known as SPAC. They acknowledged that the story of SPACs is a story of legal innovation. They discuss the investor protection strategies that SPACs borrow from traditional private equity. They also analyze the magnitude of SPACs’ departures from traditional private equity structure in the areas of voice and exit. Having seen the uniqueness of SPAC from portfolio theory perspective, Lewellen (2008) suggested considering SPAC as a separate asset class. He found that SPAC has market beta near unity despite an average leverage ratio of nearly two. He indicated that leveraged buyout investors would not be subjected to high level of systematic risk.
The widely cited study on SPAC is the one by Jenkinson and Sousa (2009) “Why SPAC investors should listen to the market.” Their study capture the most controversial SPAC phenomenon that is more than one-half of approved deals immediately destroys their value. They demand investors to observe the market’s response to the announced acquisitions. If the closing price before or on the decision date were below trust value per share, investors would not approve the deals and exit from the SPAC. They found that investors approved so many value-destroying deals were resulted from abnormal trading behavior around the decision date. They suggest that the reason perhaps come from vote-buying by the SPAC founders to ensure that they are able to recoup the extreme incentives from closing a deal – evidence of conflict of interest. Lakicevic and Vulanovic (2011) performed a similar analysis of SPAC performance by Jenkinson and Sousa (2009). They utilized more recent data and segregated their return into three subsamples based on the stages of SPAC life-cycle. They found that different SPAC securities have different reactions in response to announcements of their acquisition stage. They observed that the strongest reaction is coming from investors holding warrants compared to shares.
Rodrigues and Stegemoller (2011) further analyzed SPAC to understand its behavior in comparison with traditional IPOs and acquisitions. Traditional IPOs are well known for its mispricing on the first trading day due to noise in pricing for underwriters’ compensation. They found that initial returns are not different from zero in SPAC IPOs, and what little
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underpricing is related to the rank of the lead underwriter. Murray (2011) also found little mispricing evident in SPAC IPOs as he found that valuing SPACs is complicated by the warrants included in the unit offers. Rodrigues and Stegemoller (2011) also found that the acquisition announcement returns of SPAC acquirers are about twice as large as those experienced by traditional acquirers of private targets. They found that these returns are not related to the size of the acquirer, the target’s public status, or method of settlement. They claimed that these findings provide important insights into takeover literature in the aspect of size and uncertainty of the acquirer’s value.
More recently, Lakicevic, et. al. (2013) examines the characteristics and determinants of the merger execution performed by SPACs. They found that SPAC in a relatively short time-frame significantly redesigned their structure (i.e. by adjusting their size, the IPO proceeds in the escrow accounts, the number of warrants purchased by its founders and the percentage of deferred compensation awarded to the underwriters) in an attempt to increase the likelihood of merger outcomes. However, from their test, only some of these characteristics have statistically significant impact on merger. Further, Cumming, et. al. (2012) study about the success factors of SPAC reverse merger found that voting from SPACs’ shareholders has the pivotal role. They found that SPAC shareholders block structure and share market condition are the most important factors in the merger approval decision. Somewhat similar findings with Jenkinson and Sousa (2009) they found that a higher percentage of SPAC management ownership would increase the merger approval probability. They also noted that the presence of active investors (hedge funds and private equity funds) shareholdings would give negative correlation to the approval probability.
Additionally, the topic of cash shells, SPACs and reverse merger and acquisition has also received much attention in law related literature. Reimer (2007) concludes that SPACs can be considered a beneficial financial innovation for small firms attempting to raise funds in the public markets. Sjostrom (2008) analyses critically about going public through a shell company reverse merger. He proposes that comparing reverse merger with traditional IPO is misleading. He argues that reverse merger is not a capital raising transaction as no shares are sold for cash. However, from an operating company’s perspective, a merger with SPAC may compare favorably with traditional IPO depending on how the transaction is structured.
10 2.2.2 Corporate Governance and Cash Shells
Extant research on the impact of corporate governance on the performance of cash shells is relatively scarce. Only recently have cash shells been studied from a corporate governance perspective. Roosenboom and Vasconcelos (2009) analyzed cash shells in the UK market from the period January 1997 to June 2005. The research was performed to capture the existence of agency theory in the UK cash shells and the relationship with their stock returns. In 2010, they perform further research with extended data to year 2007 and by also utilizing different corporate governance theories. Howe and O’Brien (2012) have also performed research from a similar perspective by focusing in the SPAC market in the US from 2003 to 2008. These studies are further discussed below.
Roosenboom and Vasconcelos (2009) indicate that although, at first glance, cash shells may appear similar to Special Purpose Acquisition Companies (SPACs), it is important to note that they present important differences in terms of corporate governance and shareholders’ protection. Cash shells differ from SPACs in the ability of an investor to have his money back by voting against a deal. Shareholder approval is required for reverse mergers but by a simple majority and not by an 80% majority as in SPACs. As a result, cash shells provide a unique setting to test the predictions of agency theory. They use the term “blind faith” since the only assets of the firm are the managers’ expertise; the cash raised in the IPO; and the public listing. They separately analyzed the importance of incentive structure, the control mechanism and the reverse merger process in the cash shell’s activities. They found that outside (public) shareholder’ returns could be enhanced by employing an effective system of incentives. An incentives system is considered effective if it consists of a large fraction of equity bought by managers at the IPO and a low price discount on their pre-IPO shares. The control system in these firms seems to be less effective; they argue that this is due to the difficulty of monitoring the managers’ actions. They also found that cash shell shareholders consistently approve value destructive deals; a puzzling finding that also taken place in SPACs by Lewellen (2008) and Jenkinson and Sousa (2009).
Additionally, Roosenboom and Vasconcelos (2010) test two hypotheses: the
incentive alignment hypothesis and the reference point hypothesis. They implied that cash
shells are suitable to evaluate how incentives of managers impact the quality of the acquisition decision. This suitability of cash shells setting is mainly as a result of the original managers of the cash shell typically leave or becoming non-executive director subsequent to
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the completion of the acquisition. According to the incentive alignment hypothesis (Jensen and Meckling, 1976), more equity ownership by the manager may increase corporate performance because it means better alignment of the monetary incentives between the manager and other equity owners. In the case of cash shell, the managers/founders are more likely to make acquisitions that increase investors’ wealth. There has been plenty of evidence supporting this hypothesis in M&A research: Datta, Iskandar-Datta and Raman (2001), Tehranian, Travlos and Waegelein (1987) and Hubbard and Palia (1995).
From a behavioral perspective, the reference point hypothesis attempts to capture the impact of referencing or anchoring on the cash shell managers decision. In case of anchoring, people begin to evaluate decisions at a specific initial value, salient but perhaps entirely irrelevant, and only conservatively update this initial value upon the arrival of new information (Tversky and Kahneman, 1974). Roosenboom and Vasconcelos (2010) argue that the lower price at which managers own cash shell share (both from ‘skin in the game’ scheme or obtained from shares incentives) will be an initial price anchor which they use to evaluate potential acquisition targets. The lower the anchor, the more attractive acquisitions will appear to managers, even if it means that they are value-destroying for other shareholders that bought their shares at higher prices.
Roosenboom and Vasconcelos (2010) found that both the incentive alignment hypothesis and reference point hypothesis have merit in cash shell companies. Cash shell managers, who own a higher stake in the cash shells, experience a higher stock price reaction at the time of first acquisition announcement. However, announcement returns are substantially lower when cash shell managers have a lower reference point than the other shareholders. They also showed that managerial actions partially depend on psychological anchors that would be irrelevant if managers were fully rational.
Another study that adopts a corporate governance perspective on analyzing cash shells (and its subset like SPAC) is the one performed by Howe and O’Brien (2012). They examined how the ownership and corporate governance of SPACs influence their short and long-run performance. They analyzed the relationship of several governance characteristics with SPACs return. They found weak evidence that a more independent board is associated with better long-run performance with no indication that either managerial or institutional ownership is associated with performance. They also found that higher institutional ownership is strongly associated with lower acquisition completion rate. This is consistent
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with the incentives of institutional investors to force dissolution of SPACs when the per-share trust value is greater than SPAC’s share market price.
The notion that conflict of interest is embedded within the governance of a corporation has been the all-time key driver of corporate governance research. The field of ‘corporate governance’ in the financial theories has emerged to capture the impact and magnitude of how the conflicts between managers and investors are managed. Berk and DeMarzo (2011) infer that the conflict of interest between stakeholders in a corporation derives from the separation of ownership and control which perhaps the ability to manage this conflict of interest is the most important factor for the success of the corporate organization form. In the case of cash shells and SPACs, the focus is on the conflicts between managers and investors because its initial and most part of cash shells’ lifecycle are involving the conflict between the managers or founders with the investors or shareholders. The significance of compensation policy and monitoring system to the return performance can be observed due to their unique and simple set-up.
Berk and DeMarzo (2011) particularly discussed monitoring aspect of corporate governance earlier than the compensation. The monitoring aspect consists of the board of directors (BOD) type, form and level of independence. The design of the BOD will have an impact on how well the manager can be monitored by the BOD on behalf of the shareholders. They argue that BOD independence plays an important role in an effective BOD leading to successful performance of a corporation in meeting their shareholders expectation. While monitoring is important, compensation policy for the managers also emphasized by Berk and DeMarzo as other key important factors in managing agency conflict in a corporation.
Because at the earlier stage of cash shells monitoring from the BOD is considered minor, we are able to observe that compensation policies have been strongly utilized in the cash shells scheme to mitigate the conflict of interest between managers and shareholders. The most common and basic approach is by way of granting stock or stock options to managers. This will effectively give the manager an ownership stake in the firm thereby naturally tying managerial wealth to the wealth of shareholders. However, this cash shells’ incentive structure has been indicated by Roosenboom and Vasconcelos (2009) as the important source of divergence of interests since the managers and other insiders may enjoy the discount on their pre-IPO shares. According to agency theory, any aspect that causes a
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divergence of interests between management and shareholders has a negative impact on performance through the increase in agency costs (Jensen and Meckling, 1976).
3. Hypotheses Development
This thesis mainly extends from the study of Roosenboom and Vasconcelos (2009) which was focusing on the relationship between agency theory, incentive alignment, and governance structure with cash shells’ return. A study from Howe and O’Brien (2012) on SPAC performance with corporate governance is also being referenced. This thesis is structured to analyze further the results found in previous studies with emphasis on the BOD characteristics/attributes. BOD characteristics may have taken part in explaining their under-performance of returns. Since cash shells do not have operating assets or activities to indicate their value, I propose that its BOD attributes may drive their negative return performance.
This thesis emphasizes on recent cash shells from post-2008 crisis in order to observe behavior differences with the pre-2008 environment, its latest period of study. In addition, I also consider the need to understand the significance of pre-IPO and post-IPO parameters. To do so, post-IPO board members’ turnover is added into the tested hypotheses since it can be a good proxy for operational stability within the cash shells management subsequent to IPO and reverse merger. Stability has been viewed as the significant factor of performance.
As a result, I separately analyze three BOD attributes to get the connection of these parameters with the cash shells’ return under-performance: (i) the existence of independent board members; (ii) the busyness and experience of the directors; and (iii) the post-IPO board members’ turnover.
3.1 Board Independence
Higher independent board member proportion could lead to better performance. This is resulted from their effectiveness in selecting potential targets and their ability to reduce potential conflict of interest from the founders. Alternatively, independent directors may not be as skilled as managers or founders at identifying acquisition targets, in which case a higher proportion of independent board member would lead to worse performance. The availability of outside board members, which represent as the independent party of the cash shells’ management, has seen as the mechanism of public shareholders to control the founder’s
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agency problem (Fama and Jensen, 1983). In the model that they developed, the degree of the independence of the BOD should have an important and positive impact on the firm’s performance. This is because cash shells do not have operating activity and directors are likely being the only employee of the company. In contrast, founders have a significant role in selecting outside directors (Rosenstein and Wyatt, 1990). They may use their influence to select outside directors that are less likely or less able to monitor their activities closely (Shivdasani and Yermack, 1999). Serious doubts on the directors’ actual independence are being raised since the outside directors are nominated by the founders. The founders commonly have majority voting at the time of the general meeting prior to admission.
Roosenboom and Vasconcelos (2010) found that the existence of an independent board has a positive impact on the cash shells performance but never at a significant level. In their research, they consider a board independent if half or more of its members are independent in line with UK’s Combined Code on Corporate Governance. They also noted that there is a thin line between independent and non-independent board members in cash shells. In addition, Howe and O’Brien (2012) found that there is sufficient evidence that the SPACs with higher board independence have better three-year long-run performance subsequent to the acquisition but not at the announcement date or shorter term. Based on these findings, the relationship between board independence with return performance of listed acquisition vehicles seems to be innocuous.
Hypothesis 1: There is a positive relationship between board independence with cash shells’ return performance in the longer term (i.e. 3-years).
3.2 Board Busyness and Experience
Directors that serve in many firms’ boards had received attention from the academic literature and the business press. Fama and Jensen (1983) suggest that directors’ busyness signals their quality. The higher the quality the more frequent they will be asked to serve on additional boards. Field, Lowry, Mkrtchyan (2012) examine the effects of busy boards for newly public firms. They argue that newly public firms are likely to rely heavily on their directors for contacts and advise on a variety of matters. They found that multiple directorships are common among newly public venture-backed firms and not solely a large-firm phenomenon (Ferris, Jagannathan and Pritchard, 2003). Field, Lowry, Mkrtchyan (2012) challenge the conventional wisdom that limiting multiple directorships will enhance firm value. They found that there is no evidence of a negative relation between board busyness
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and firm performance within S&P 1500 firms. In the contrary, Roosenboom and Vasconcelos (2010) found that the cash shells created by experienced directors that involved in three or more cash shells, performed significantly worse than average in the three years following the IPO. Their findings suggest that serial creators of cash shells seem to gain experience on how to profit from cash shells personally but not on how to create long-term value for the shareholders.
Cash shells are newly public firms that created by its founders commonly having multiple directorships on their business empire. Cash shells and multiple directorship directors appear to be a package that naturally taken place in its establishment. In other words, the cash shells’ directors can be seen as high quality if they can be associated with a success in building their business primarily on financial services. This leads to their multiple directorship expansion. In addition, cash shells with a reverse merger are associated with back-door access to the capital markets that are needed by their counterparts. The experience and well known directors on their boards is commonly part of the transaction offerings.
Nonlinearity could also be a potential case with regard to the relationship between board busyness and return performance. Board busyness may have positive implications for performance to a particular level which if surpassed may be value destroying. This thesis attempts to reconfirm the relationship between board busyness with cash shells return performance and understand whether nonlinearity may have taken place.
Hypothesis 2: There is a negative relationship between board busyness and experience with cash shells’ return performance in the longer term (i.e. 3-years). 3.3 Post-IPO Directors’ Turnover
Modern corporation trust boards of directors to oversee the management’s performance and steward the shareholders’ wealth. Therefore, corporations reward vigilant directors with directorships and equity holdings for being good watchdog. In contrast, lax directors betray shareholders’ trust and consequently lose directorships and pay penalties (Fama and Jensen, 1983). Moreover, directors have incentives to leave when firms perform poorly or are in financial distress (Agrawal et. al. 1999, Fahlenbrach et. al. 2010, Asthana and Balsam 2010, and Chang 2011, all for US evidence).
In her study over the linkage between Chairman and CEO dismissal in the top 460 UK firms during 1990-1998 periods, Florou (2005) founds that Chairman and CEO dismissal
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have a significant inverse relationship with the prior year stock performance. Given its broad array of samples observed, it is strongly predicted that the same situation will be reflected in the cash shells environment. It is also important to note from her findings that the dismissal of the CEO has significant implications for the Chairman’s tenure. Additional information surrounding the dismissal events supports the ‘restructuring’ argument that Chairman’s replacement enables changes in board composition with different set of skills. This is as part of the implementation process of corporate and board restructuring.
In light with the above, higher turnover on the BOD members may indicate post-IPO dynamics in the cash shells. In cash shells with a reverse merger, this situation may come from power sharing situation between cash shells and its target which both sides probably have their own idea about restructuring. Higher BOD turnover may provide a signal to the market that leads to the market tendency to separate between a good deal and a bad deal (Jenkinson and Sousa, 2009). Alternatively, lower BOD turnover means that there is stability within the merged companies which may be coming from stronger managers/founders position or longer term focus of managers/founders incentive scheme. In a non-reverse merger cash shell, higher turnover may indicate corporate and board restructuring which is consistent with the changes in investment strategy/policy that often time should be taken by cash shells’ shareholders. The ‘restructuring’ argument suggests that the introduction of new strategies requires new managers with different viewpoints and abilities. Based on these arguments, post-IPO BOD turnover appears to have a relationship with cash shells’ return performance.
Hypothesis 3: There is a negative relationship between post-IPO directors’ turnover with cash shells’ return performance.
3.4 Issues Surrounding the Research on Board of Directors
Hermalin and Weisbach (2000) surveyed the studies that have been done on board of directors in economics and finance professions and its implications for governance. From their study, the primary findings from the empirical literature on board of directors are: (i) board composition is not related to corporate performance; (ii) board size is negatively related to corporate performance, and (iii) both board composition and size appear to be related to the quality of the board’s decision regarding CEO replacement, acquisitions, poison pills, and executive compensation. Firm performance, CEO turnover, and changes in ownership structure are significant factors affecting changes to boards. Despite of these
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findings, they also found that most research on boards begin with the assumption that directors’ effectiveness is a function of the board’s independence from management. The challenge to confirm the board’s actual independence, together with endogeneity issues, has made empirical work on boards of directors a challenging topic due to the econometric issues raised and the difficulties of interpretation.
Further to the above, example of BOD research in the UK market with similar issues can be seen at Florou (2005). She founds that BOD Chairman and CEO dismissal are jointly and negatively dependent on firm performance. Given that Chairman and CEO dismissal are jointly and negatively dependent on firm performance, a positive correlation between the two variables could be attributed to the endogeneity of the latter. Consequently, one cannot draw
causal inferences between these two variables. Instead, the relationship should be interpreted
as an association.
Therefore, it is necessary for the reader of this thesis to understand that the result of the hypothesis testing on the above 3 (three) BOD attributes to the cash shells’ return performance is limited to obtain the relationship at the interpretation level of an association rather than causal relationship.
4. Data and Methodology
4.1 Data
As a further extension of a previous study, the approach for the data collection of this thesis follows a similar path that Peter Roosenboom and Manuel Vasconcelos had taken on their study in 2009. Their research was focusing on cash shell companies data going public in the UK market (AIM) between January 1997 and June 2005. An extended data to 2007 were used for their latter research. There are some changes in the methodology to accommodate appropriateness with the hypotheses testing focus as the emphasis has been placed to recent post-crisis cash shells. The samples of cash shell companies’ floating in LSE (both in Main market and AIM) are obtained up to early 2013. However, to ensure at least two years of data for every firm, cash shells with listing date by 2011 at the latest is the main focus of analysis.
There is no specific industry code for cash shell companies floating in the LSE. They may be classified under investment companies, or under the code of the industry they intend
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to pursue acquisitions. Therefore, in obtaining the sample of cash shells, similar approach from Roosenboom and Vasconcelos has been combined with the methodology from Cash Shells Directory Report from VitesseMedia plc. The criteria to categorize an entity as cash shells are as follows:
• Have no operating activity or interests in any company at the time of going public • Raise cash in the IPO by issuing shares to new investors
• Have a well-defined strategy of acquiring significant stakes in other firms or, in the majority of the cases, proceed to a reverse merger into another company, with no specified time horizon (no exit strategy)
• Have investment strategy/policy with more cash than investments
As a result of non-specific classification for cash shells in the UK market, alternative procedures are taken in order to obtain the sample of cash shells. The review of public website from LSE Main Market and AIM list of companies has been performed to obtain cash shells with the above characteristics. The public website review is performed for the period from 2008 to 2012 with more than 500 companies being checked. The results from this exercise are then combined and synchronized with cash shells listed in the Cash Shells Directory Report from 2010 to 2013 issued by VitesseMedia plc., LSE publication on ‘Listed Acquisition Vehicles’ and various reference sources (Amadeus, Zephyr, ThomsonOne). From this exercise, I believe that the samples obtained have represented the population for the purpose of this thesis. Despite the procedures performed, the complete population of cash shells is not able to be confirmed because those cash shells delisted during the period of data screening may not be included.
The BOD attributes data are hand-collected from the relevant Admission Documents or also known as Prospectus, obtained from the company’s website and/or ThomsonOne. Each admission documents is carefully read through to obtain the following BOD attributes:
(i) the number of board independent members; (ii) the size of BOD; (iii) the list of entities
that the board members holding directorship at the time of IPO/Admission and in the last five years; (iv) the acquisition (reverse merger) plan or investment objective; and (v) the ownership structure at the time of admission. In addition, subsequent annual reports up to three years after the IPO/Admission are also carefully analyzed to hand-picked the number of BOD position changes (additions, replacements and resignations).
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The reporting format of admission documents are well standardized although there are variations in the way the independent directors are presented. In the event that independent directors are not clearly informed, the directors’ background and experience are checked to the details of the admission documents. Those that are not involved in the company (or its group) prior to appointment are considered to be independent. For larger cash shells, BOD historical changes are conveniently presented in the annual reports. In the smaller cash shells, the BOD changes are tracked from the directors’ name listed between the admission documents and the annual reports. The directors’ name is commonly available in the earlier pages of the admission documents and annual reports. Further information about cash shells investment arrangements and the directors backgrounds are available at the later part of the admission documents.
4.2 Methodology
The return on the stock of each cash shells for one, two and three years after the IPO is calculated using annualized buy-and-hold abnormal returns (BHAR) as also the approach taken by Roosenboom and Vasconcelos. The abnormal returns are computed by subtracting from the annualized raw returns, the return provided during the same period by the AIM all-share index or FTSE index, as applicable. It is assumed market beta of one for all the firms, as a result of the lack of pricing history and following the standard methodology in the IPO literature (e.g. Loughran and Ritter, 1995). This approach is known as ‘index model’. The event date used to calculate the abnormal returns have been differentiated between those cash shells with and without reverse merger. For cash shells with a reverse merger, the event date is the date when the merger entity floated in the market which may not be the first time IPO/Admission date. The event date is the first IPO/Admission date for those without reverse merger. The reason for this approach is for consistency purposes whereby merged cash shells are commonly equipped with a new set of BOD structure.
A different approach from the previous study by Roosenboom and Vasconcelos (2009) is related to the treatment of warrants. For consistency reason with the efficient market hypothesis, the value of the warrants is assumed reflected in the share price. As a result, the value of warrants is not separately calculated and added up to the total returns. The returns obtained for each year are then used as the dependent variable and regressed on the BOD characteristics at the time of the IPO and on control variables. Whenever a cash shell is delisted in the three years following the IPO the annualized return will be calculated up to the
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moment of delisting, instead of excluding it from the sample. Similarly, if a cash shell’s is not yet having its completed last full year period following the IPO the annualized return will be calculated up to 15 July 2013.
The returns obtained for each year are then used as the dependent variable and regressed on the BOD attributes at the time of relevant IPO/Admission date and on control variables. As discussed in Section 3, the main variables that this thesis would analyze are (i) board independence ratio, (ii) board busyness and experience and (iii) post-IPO directors’ turnover. The control variables selected are the board size and board independence ratio with dummy variables are reverse merger and industry group. The date of floating informed in the Admission documents is checked its consistency with LSE database. Some BOD attributes are cross-checked to Amadeus database. Stock prices and index position are retrieved from Datastream. Table 1 shows the definition of the variables used in this thesis.
[Please insert Table 1 about here]
This thesis utilizes event study method in analyzing the relationship between BOD characteristics and cash shells under-performance. The event study methodology is introduced by the paper from Fama, Fisher, Jensen and Roll in 1969 as part of the development of the new Center for Research in Security Prices (CRSP) monthly return data for New York Stock Exchange stocks. Campbell, Lo, MacKinlay (1997) give a brief outline of the structure of an event study as having seven steps: (i) event definition; (ii) selection criteria; (iii) normal and abnormal returns; (iv) estimation procedure; (v) testing procedure;
(vi) empirical results; and (vii) interpretation and conclusions. This thesis essentially follows
these steps with tailored procedures to accommodate data needs and preserve consistency with previous studies.
Event study methodologies have a number of potential problems of concern in the literature. Brown and Warner (1985) investigates those include (i) non-normality of returns and excess returns; (ii) bias in ordinary least square (OLS) estimates of the market model parameters in the presence of non-synchronous trading; and (iii) estimation of the variance to be used in hypothesis tests concerning the mean excess return and the issues of autocorrelation. They found that non-normality of daily returns has no obvious impact on
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event study methodologies. This is because the mean excess return in a cross-section of securities converges to normality as the number of sample increases. Procedures other than OLS appear to not having significant benefit in detecting abnormal performance. They also suggest further research is needed to understand the properties of alternative procedures in variance estimation.
Armitage (1995) analyzed the findings found by event study researchers in their simulation experiments to test different models of abnormal returns: index model, average return model, market model, capital asset pricing model (CAPM), Fama-MacBeth model, and control portfolio model. He concluded that the different models produce similar but not identical results. He noted that the market model is the most reliable in the sense that, across each of the range of circumstances tested; it is always at least as robust as the best alternative. The average return model, though simple, should be avoided when event dates are shared or when events are in a bull or bear markets. Choice of market index and identification of event periods also affects the performance of the market model. He also suggested that the shorter the interval over which each returns observation is measured (daily, weekly, etc.), the easier the abnormal returns can be identified. Also, the event date should be identified as precisely as possible and used daily data if possible.
Further, John Binder (1998) discusses the development in the event study methodology including hypothesis testing, benchmarking for normal rate of return, the statistical power of event studies and the modeling of abnormal returns as coefficients in a (multivariate) regression framework. The results of various studies indicate that event study methodology is, with some corrections for statistical problems that arise in certain cases, a powerful tool to detect the impact of events on security prices. He also found that the event study methodology appears to have little statistical power to detect abnormal returns where the event date is not known, e.g. regulatory events that have a long process of formal announcements. Therefore, careful choice of the event date and better linkage to firm characteristics being regressed is needed.
Numerous event studies have the estimator of long-term abnormal performance as its most important component. The most popular estimator of long-term abnormal performance is the mean buy-and-hold abnormal return (BHAR). Mitchell and Stafford (2000) reexamine the reliability of mean BHAR to measure long-term abnormal performance. They found that this popular approach is not an adequate methodology because it assumes independence of
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multiyear event-firm abnormal returns. Event-firm abnormal returns are positively cross-correlated when overlapping in calendar time. They strongly advocate ‘the calendar-time portfolio approach’ since it accounts for the dependence of event-firm abnormal returns.
The implication of the above notes from event study literature review is somewhat minor for the purpose of this thesis. This is due to the known and specific event date (i.e. IPO/Admission date) and relatively narrow focus of samples i.e. cash shells. The concerns noted above are mainly related to the broad arrays of population and time specification. In terms of the estimator of long-term abnormal performance, 3-years annualized BHAR is utilized without extending it into its mean BHAR since the research has specific samples i.e. recent cash shells.
4.3 Descriptive Statistics
There are 104 cash shells companies identified from the combination of data review over: (i) LSE listed companies at Main Market and AIM from 2008 to 2012; (ii) Cash Shells Directory 2010-2013 published by VitesseMedia plc.; (iii) LSE publications and other sources. From further detail review, there are 18 cash shells considered as not meeting cash shells criteria set above and/or governance data is unavailable. As a result, there are 86 cash shells being processed to obtain their complete governance datasets and share prices. As the primary database incorporated all cash shells until early 2013, we exclude ten dirty cash shells and twenty recently formed cash shells with less than 3 years floating period. Table 2 shows the process of the sample selection and historical results of cash shells in performing IPO in the UK market.
[Please insert Table 2 about here]
Earlier pre-2008 cash shells are still obtained as samples (31% of 86 cash shells). This composition is still considered achieving the objective to emphasize on recent cash shells. The difference in the amount of cash shells for the same coverage period with the previous study by Roosenboom and Vasconcelos is caused by the recently being delisted cash shells. These delisted cash shells were naturally unobserved from the above data screening procedures. However, from recent cash shells we are able to observe the tremendous growth
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rate of cash shells both in its money raising and value generation ability particularly during 2008 to 2011. The total money raised from cash shells from 2009 to 2011, as also unofficially reported in a recent LSE publication, is approximately reaching £ 4.4 billion.
In contrast with pre-2008 cash shells, institutional investors appear to be strongly existed in recent cash shells. There are only 14 cash shells noted without institutional investors (16% of 86 cash shells) while the rest has institutional investors ranging from less than 5% up to more than 90%. At the time of IPO/Admission, the average institutional ownership on cash shells with institutional investors is about 42% to 46% (Table 3). Most of the cash shells are searching for targets in a sector that consistent with their investment policy. Almost all of the cash shells address corporate governance issues in their admission documents and confirm their compliance with the UK combined code on corporate governance. Though, especially on cash shells with small placing, the UK combined code is not fully implemented in practice with the reason of the company’s size.
The board of directors with independent members’ ratio about half or more is taking place in 55 cash shells (64% of 86 cash shells). The UK combined code on corporate governance considers a board to be independent if there are half or more of its members are independent. An independent director is defined as one that has no business connection to the firm, management team or any of the founding shareholders (Rosenstein and Wyatt, 1990 and Kim, et al, 2007). However, as mentioned also by Roosenboom and Vasconcelos, determining independent board members from non-independent members in cash shells is a challenge. There is a high likelihood that the independency is being questioned due to the relationship with the founders. For the purpose of this thesis, independent directors are being counted if the admission documents confirmed so. If not explicitly said, background check to the directors is performed through review of directors’ information in the admission documents or in the public search engine. Directors that is not involve in the company (or its group) prior to the appointment is considered to be independent.
The board size of cash shells consists of five directors in average. A typical director is a very experienced and well-connected individual that hold in average about 11 to 12 directorships outside the cash shells when appointed. In addition, the directors hold past directorships in 13 to 15 companies, in average, over the last five years before their appointment. Most cash shells have directors with experience in the financial industry obtained either from investment banks, private equity houses or their own financier
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experience. Often the cash shells director is coming from the industry sector where the cash shells intend to pursue their acquisitions.
The average of board turnover ratio for 12 months after IPO/Admission is about 0.8 times. The number is increasing to 1.1 times during 13 to 24 months after IPO/Admission for samples that have floated in 3-years period (56 entities). The average turnover ratio is decreasing to 0.5 times (for 86 entities) and 0.7 times (for 56 entities) for the period of 24 to 36 months after IPO/Admission. A summary of the board of directors’ characteristics of the sample can be found in Table 3.
[Please insert Table 3 about here]
The average level of underpricing for the cash shells samples is 4.8% (or 7.6% for 56 entities). It appears that the degree of underpricing is predictable compared to those reported in Roosenboom and Vasconcelos (2009) at the amount of 32.9% for pre-2008 cash shells. The increasing involvement of institutional investors in the recent cash shells is an indication that nowadays cash shells have broadened their ownership basis. It is also an indication of greater liquidity in the market. The need to broaden the ownership basis and increase the liquidity of the shares post-IPO is commonly being the reason why the underpricing tends to be high (Zheng and Li, 2008). Despite the risk involved still appears high, the effect of broader ownership and greater liquidity seems significantly reduced the underpricing level for recent cash shells.
Table 4 presents statistics of cash shells’ annualized BHAR post-IPO. The measurement of the annualized BHAR is as explained in Section 4.2 Methodology. The median cash shells has negative returns in every of the three years following the IPO. The average return decreased substantially over time although positive returns are still observable in the first year after IPO. The fraction of cash shells with negative annualized BHAR is increasing throughout the three years following the IPO from about 55% to 71%.
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Another interesting statistics is the difference caused by reverse merger. It appears from Table 4 that the average returns for cash shells with a reverse merger have been negative since the first year (-7.34%) while those without reverse merger have positive returns (37.39%). The average and median returns of cash shells with a reverse merger have been more negative than those without reverse merger in the second and third year. It is also observable that there are cash shells without reverse merger having extreme deviation from the mean returns. Overall, these statistics are showing again how cash shells have consistently underperformed the market, which is similar with pre-2008 cash shells statistics presented by Roosenboom and Vasconcelos (2009).
5. Empirical Results and Robustness Tests
5.1. Empirical Results
The objective of the hypothesis testing is to obtain whether there is a relationship between cash shells BOD characteristics with their returns performance. The tested characteristics are focused on three BOD attributes: (i) the existence of independent board members; (ii) the busyness and experience of the directors; and (iii) the post-IPO board members’ turnover. The procedures performed for this purposes are by regressing the annualized BHAR in the years following IPO/Admission on the BOD tested attributes. The main exercise is performed by regressing annualized BHAR for each of the 3-years on all variables (test, control and dummy variables). Table 5 discloses the regression results of annualized BHAR on all BOD tested attributes with complete 3-years samples.
[Please insert Table 5 about here]
The existence of independent board members, represented by its independent member ratio, appears do not affect the under-performance of cash shells despite its increasing influence in 3-years. The coefficients showed a positive relationship although never at a significant level. This is in line with the findings of Roosenboom and Vasconcelos (2009) that the effect of the control system, one of which is BOD structure (independence and size), is not as clear as the effect of the monetary incentives of managers/founders. They proposed
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two alternative reasons that caused the unclear effect of the control system: (i) the inherent difficulty in monitoring the activities of managers and (ii) the independent board members are selected by the founders.
The similar insignificant tendency appears for the variable of busyness and experience of the directors appointed at the time of the IPO/Admission. The significant level is increasing for the directors’ busyness while the directors’ experience significance level had decreased within 3-years period. This result is different with the Roosenboom and Vasconcelos (2009) finding that “experienced” directors with serial cash shells creation performed significantly worse than average in the 3-years following the IPO. The reason for this perhaps comes from the increasing involvement of institutional investors in the creation of the recent cash shells. On the reason why investors kept buying shares in cash shells despite its negative returns, Roosenboom and Vasconcelos (2009) argue that the market seems lagged in understanding the track record of the founders as the full consequences of the poor corporate governance of their shells were not visible yet. The cash shells investors’ odd behavior may not be linked solely to their lags in understanding the founder’s track record. This is due to no significant relationship between directors’ busyness and experience with recent cash shells under-performance.
In contrast with the above two variables, the post-IPO directors turnover had shown significant relationship with annualized BHAR for 3-years return. The coefficients itself has a negative relationship which is consistent throughout each of the one, two and three years subsequent to IPO. The under-performance of cash shells may entail changes to the directorship. In the other side, the more frequent changes in the directors the more negative signals inference by the market. The directors’ turnover can be a good proxy for operational stability within the cash shells management subsequent to IPO and reverse merger.
Table 6 provides regression results on different samples group in each post-IPO observation year (i.e. 86 observable cash shells in 1-year after IPO, 74 observable cash shells in 2-years after IPO vs. 56 observable cash shells in all 3-years period after IPO). The results are still consistent with the main regression exercise with 56 samples. However, we can see higher significance in the first year with 86 samples for BOD independent ratio. From all of observation years and samples group, we can see that the significance level for each variable is lower in the second year compared to the first year and third year subsequent to IPO. In overall, for all samples group, the empirical results had shown consistently that post-IPO
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director turnover had a significant relationship with cash shells negative return while the board independence, busyness and experience appear to be insignificant in explaining their under-performance.
[Please insert Table 6 about here]
With regard to non-linearity of board busyness, as shown in Table 7, it appears that it had taken place within 1 year after IPO. The inclusion of the squared term of board busyness variable had resulted to the increasing significance of the variable of board busyness in the first year after IPO. However, the non-linearity of board busyness does not appear significant within two to three years subsequent to IPO. This result indicates that the board busyness significance is stronger in the first year subsequent to IPO compared to later years. The insignificance of non-linearity of board busyness in later years seems to be in line with the relationship of post-IPO director turnover. The investors appear to perceive the board busyness, up to a certain level and period, as an essential component of their initial investment decision making. Another non-linearity test had also performed for board experience by adding up the squared term of board past directorship. The result is insignificant and does not impact the other independent variables. The result is not presented due to brevity reason.
[Please insert Table 7 about here]
5.2. Robustness Tests
The robustness tests are performed to measure the consistency of the relationship between variables if the independent and dependent variables scenario are changed. From the dependent variables side, the robustness check is performed by regressing BOD attributes on two types of the time dimension abnormal returns on the basis of index model i.e. annualized BHAR and monthly abnormal returns. This exercise is based on Armitage (1995) that suggest the shorter the interval over each return observation is measured, the easier the abnormal
