Board Composition and Acquisition
Performance in an Emerging Market
Context:
The Role of Concentrated Ownership
UNIVERSITY OF GRONINGEN m.stolte@student.rug.nl Groningen, June 2017 By: Marnix Stolte S2957507
Taco Mesdagstraat 26-A 9718 KM, Groningen
MSc International Business & Management Faculty of Economics and Business
University of Groningen
Word Count: 9,979 (excl. references & appendices)
Supervisor:
Dr. Sathyajit Gubbi
Co-assessor:
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ABSTRACT
Extant literature argues that acquisitions are more likely to decrease the acquiring firm’s value instead of increasing it. The skills, experience, expertise, and knowledge on a board may play an important role in the complexity of acquisition decisions. However, existing scientific findings regarding the actual influence of a board’s composition on different firm performance outcomes have been inconclusive. This study argues that emerging market firms rely more on internal governance mechanisms like the board of directors. Emerging markets are, therefore, considered to be best suited as research context to gain new insights regarding a board’s influence on performance outcomes and acquisition performance in particular. The results were drawn out of a sample size of 158 acquisitions made by 110 Indian firms, which showed no significant effects in favour of this study’s hypotheses. Nevertheless, analysing a sub-sample of acquisitions that took place before the change in SEBI regulations in the year 2013 resulted in support of a positive moderation effect of concentrated ownership on the relationship between the level of board independence and acquisition performance. This study raises new questions regarding possible unintended influences of introducing external governance mechanisms in an emerging market context.
Key Words: Board Composition, Acquisition Performance, Ownership Concentration, Gender
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TABLE OF CONTENTS
INTRODUCTION ... 4 LITERATURE BACKGROUND ... 7 Acquisition Performance ... 7 Board Composition ... 8THEORY AND HYPOTHESES ... 10
Board Gender Diversity ... 10
Board Independence ... 12
Ownership Concentration ... 14
METHODOLOGY ... 17
Data ... 17
Variables and Measures ... 18
ANALYSIS AND RESULTS ... 21
Robustness Check ... 25
CONCLUSION ... 27
Discussion and Implications ... 27
Limitations and Future Research ... 29
ACKNOWLEDGEMENTS ... 31
REFERENCES ... 31
APPENDIX A: ASSUMPTION CHECK ... 42
APPENDIX B: CORRELATION MATRIX ... 44
APPENDIX C: ROBUSTNESS CHECK RESULTS ... 45
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INTRODUCTION
Existing literature has not yet been able to fully explain why so many acquisitions fail (Hazelkorn, Zenner, & Shivdasani, 2004), even though acquisition performance is considered as a firm performance outcome with a high level of economic importance (Liu, Chen, & Pai, 2007). Corporate boards play an important role in acquisitions, since a firm’s board of directors has the responsibility to govern and oversee the direction and functioning of the organization (Carroll & Buchholtz, 2011). In practice, however, boards do not only have a monitoring function, but also provide resources like legitimacy and counsel (Hillman & Dalziel, 2003; Korn/Ferry, 1999). So, in theory, both board functions relate to firm performance outcomes (Boyd, 1990; Hillman & Dalziel, 2003). This could suggest that a firm’s board of directors has a crucial influence on the success or failure of a firm’s acquisition deals.
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The second generally used perspective focuses on the mix of independent and executive directors within a board (Routray & Bal, 2016). The degree of a board’s independence has been the focus of multiple studies (Chatterjee, 2011), and is often seen as a crucial driver of ‘good’ corporate governance (Ramdani & Witteloostuijn, 2010). The presence of outside directors in a firm’s board may play an important role in dealing with issues regarding strategy, performance, management of conflicts and standards of conduct (Chatterjee, 2011).
The relationship between a board’s composition and a firm’s performance outcomes received great interest in managerial and academic fields (Haleblian, Devers, McNamara, Carpenter, & Davison, 2009). However, the published evidence remains focused on developed economies (Mahadeo, Soobaroyen, & Hanuman, 2012). Nevertheless, previous literature suggests that the influence of a board’s monitoring function on performance outcomes is most valuable when the corporate governance systems in a country are weak or non-functioning (Adams & Ferreira, 2009), which is often the case in emerging countries (Abdullah, Ismail, Izah, & Nachum, 2014). Since a firm’s board of directors is commonly considered to be the most important internal control mechanism (Cueto, 2013; Jensen, 1993), this study suggests that a board’s composition is likely to be of particularly great value for emerging market firms. Hence, the influence of a board’s level of gender diversity and board independence may be larger in emerging market contexts. Further studying this could lead to new insights regarding a board’s influence as internal corporate governance mechanism in both contexts. Acquisitions are ideal for investigating differences between board members’ behavioural traits, since acquisitions are highly important economic activities that usually do not add any value for shareholders (Andrade, Mitchell, & Stafford, 2001). This study, therefore, aims to answer the following research question:
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Differences in ownership structure also affect board members’ incentives to monitor, influence and/or control the firm’s executives (Shleifer & Vishny, 1986). This leads to the following additional research question:
Does ownership concentration affect the relationship between an emerging market firm’s board composition and its acquisition performance?
The core proposition of this study is that external governance mechanisms are often weaker in emerging markets and that the boards’ monitoring function is therefore crucial for corporate governance in an emerging market context. Therefore, this study proposes that a higher level of gender diversity and board independence results in better acquisition performance through more unique and divergent opinions, which leads to more creative and innovative decision making. Furthermore, this study argues that a higher level of gender diversity and board independence helps firms to get access to critical resources (e.g. legitimacy) and ensures that a board takes greater care in the monitoring of executives.
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LITERATURE BACKGROUND
Acquisition Performance
The goal of a lot of acquisitions is to capitalize on potential synergies between acquirers and targets (Weber, Yedidia Tarba, & Reichel, 2009). The synergy perspective of neoclassical economic theory suggests that when acquisitions generate synergies, the acquiring firm will get positive returns on the announcement (Dopfer, 1991). Based on this perspective, different scientific articles argue that firms are acquired when the value of the combined resources of the firms is expected to be greater than the sum of the individual values of the firms (Bradley, Desai, & Kim, 1988; Seth, 1990). A likely explanation for the fact that returns of acquisitions vary significantly from deal to deal (Haleblian et al., 2009; King, Dalton, Daily, & Covin, 2004) is that acquired firms cannot generate long-term value for the acquiring firms without successful post-acquisition integration (Zollo & Singh, 2004). Thus, a key factor for future acquisition success is learning from previous acquisition experiences (Duncan & Mtar, 2006).
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Board Composition
Literature researching a relationship between a firm’s board of directors and the firm’s performance outcomes generally follows one of two distinct theoretical arguments (Hillman & Dalziel, 2003). The most common of the two general arguments is that of agency theorists who argue that one of the board’s key activities is monitoring the management of the firm on the behalf of shareholders (Boyd, 1990; Johnson, Daily, & Ellstrand, 1996; Pearce & Zahra, 1992). This key activity is of particular importance in the case of acquisitions since neoclassical economic theory argues that managers who focus on growth-maximization use acquisitions for their personal empire building motive, which often leads to negative returns for shareholders of the acquiring firm due to agency issues (Hillman & Dalziel, 2003; Rani, Yadav, & Jain, 2016). Furthermore, theory on ‘managerial hubris’ argues that managers of an acquiring firm make incorrect valuations of target firms, but still go ahead with the acquisitions because of the overconfidence in their own valuations (Roll, 1986; Shleifer & Vishny, 2003). A firm’s performance can, therefore, be improved by its board of directors since board members are able to reduce these agency costs (Fama, 1980; Zahra & Pearce, 1989).
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costs (Williamson, 1984), and ultimately improve firm performance outcomes (Dalton, Daily, Johnson, & Ellstrand, 1999). Based on these perspectives, this study aims to answer the following research question: Does board composition influence the firm’s acquisition performance in an emerging market context?
Although it is argued that the increasing level of globalization forces corporate governance practices to converge towards an Anglo-American model, there are unique conditions in emerging markets that require further investigation (Singh & Gaur, 2009). This is especially the case, since governance arrangements in these countries are usually quite different in comparison with those in developed countries (Agnihotri, 2013). For example, emerging markets that lack the required institutions for efficient market based exchanges are often characterized by the pyramidal ownership arrangements of firms in the form of business groups (Almeida & Wolfenzon, 2006). Again, consistent with other global studies, the results of the existing literature in an emerging market context are very mixed (Manna, Sahu, & Gupta, 2016). Therefore, this study will also look for potential answers to the following research question: Does ownership concentration affect the relationship between an emerging market firm’s board composition and its acquisition performance?
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independence amongst board members has a positive effect on firm performance (Bijalwan & Madan, 2013; Daily & Dalton, 1994; Fama & Jensen, 1983), while other researchers found no correlation between independent non-executive directors and improved performance outcomes (Kota & Tomar, 2010). Nevertheless, this study argues that both a board’s level of independence and gender diversity adds value to a board’s monitoring capabilities and ultimately influences a firm’s acquisition performance. This relationship will be discussed in more detail in the next ‘theory and hypotheses’ section.
THEORY AND HYPOTHESES
Board Gender Diversity
The resource dependency theory includes some very persuasive arguments in support of a gender diverse board. The most important argument of resource dependence theorists is that corporate boards serve to link the firm and its environment to secure critical resources (Pearce & Zahra, 1992; Pfeffer, 1972; Saeed, Yousaf & Alharbi, 2017). Different theorists have argued that an increase in the size and diversity of the board of directors would increase the link of the organization to its external environment and would help secure critical resources, like prestige and legitimacy (Pearce & Zahra, 1992; Pfeffer, 1972; Pfeffer & Salancik, 1978). Gaining legitimacy is particularly important for emerging market firms because of the relatively recent liberalization of emerging market economies (Bangara, Freeman, & Schroder, 2012). Legitimacy provides a firm with access to crucial resources (e.g. customers, suppliers, and capital) in foreign markets as well as in the home country (Sanders & Carpenter, 1998).
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Bal, 2016). McInerney-Lacombe (2007) found that group interpersonal interaction changes when there is female presence on boards, which leads to more creative and innovative decision making and ultimately to improved performance outcomes. Furthermore, research has suggested that women are generally less tolerant when it comes to opportunistic behaviour and take greater care in monitoring executives and maintaining transparency in the firm’s reporting (Srinidhi, Gul, & Tsui, 2011). Hillman, Shropshire, and Cannella (2007) suggest that female presence in the boardroom helps organizations to maximize the access to critical resources, since their skills, competencies and knowledge are different from those of male board members. From an economic psychology perspective, research has shown differences in men’s and women’s financial decision making. Different researchers argued that women are likely to be less risk seeking than men and that they, therefore, use different strategies in financial decision making (Opstrup & Villadsen, 2015; Powell & Ansic, 1997). Adams and Ferreira (2009) found proof of the fact that female directors attend board meetings more frequently and are more likely to be part of monitoring committees.
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monitoring function on firm performance is most valuable in an emerging market context (Abdullah et al., 2014; Adams & Ferreira, 2009). This absence of external mechanisms to monitor a firm’s executive management emphasizes the beforementioned monitoring capabilities of female board members (Morck, 2000).
This study follows the believe of Chen, Crossland and Huang (2014) that boards of directors with one or more female directors will lead to more thorough intra-board discussions and more active monitoring in the evaluation of the recommendations of executives. During the decision-making process, boards with female representation will be more aware of the complexity of acquisitions (Haspeslagh & Jemison, 1991), the uncertainty of acquisition payoffs (Haunschild, 1994), and the fact that most acquisitions fail (Chatterjee, 1992). This makes it more likely that deals get shelved. Boards with a high level of gender diversity are, therefore, likely to engage in acquisitions more carefully and will assess any acquisition deal more thoroughly. This is expected to benefit emerging market firms particularly due to the lack of efficient external governance mechanisms. All the beforementioned arguments lead to the following hypothesis:
Hypothesis 1: A gender-diverse board of directors positively influences acquisition performance of emerging market firms.
Board Independence
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market context (Ararat & Dallas, 2011). The number of independent members in a firm’s board may, therefore, be even more crucial in an emerging market context.
Agency theorists believe that board independence addresses inefficiencies that may be caused by the separation of ownership and control (Fama & Jensen, 1983). They suggest that the board of directors, and particularly independent or outside members, are given a position in the board to monitor managers on behalf of the firm’s shareholders (Lynall, Golden, & Hillman, 2003). These outside-directors are better positioned to monitor executives because of their independence from the firm’s executives (Fama & Jensen, 1983), and because of the expertise they gained through past experiences outside the firm (Mace, 1986). Outside-directors act and think more objectively, because their reward and career is not affected by their decisions as is the case with insiders (Rechner & Dalton, 1991). In most cases, outside-directors function as arbitrators in resolving any dispute between internal executives (Routray & Bal, 2016). Therefore, from an agency theory perspective, a board with a fair number of independent directors is more likely to effectively oversee the firm’s CEO and any other executive director (Ramdani & Witteloostuijn, 2010).
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research suggests that the level of a board’s independence improves the capacities of the firm’s directors to have an influence on the firm’s strategic decision-making, which includes its acquisition decisions (McDonald et al., 2008). Hence, directors (all with their own unique personal resources) are also able to propose acquisition deals instead of only approving or rejecting acquisition targets proposed by executives (McDonald et al., 2008). This leads to the following hypothesis:
Hypothesis 2: A higher level of board independence within emerging market firms’ board of directors positively influences acquisition performance.
Ownership Concentration
Differences in ownership structure affect board members’ incentives to monitor, influence and/or control the firm’s executives (Shleifer & Vishny, 1986). Owning a large total equity share could improve the effectiveness of monitoring executives for a group of shareholders (Clarke, 1998). However, this group could also take advantage of other (minority) shareholders since high concentration of ownership provides controlling shareholder groups and executives with the opportunity to expropriate from minority shareholders (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2000; Morck, Shleifer, & Vishny, 1988). Agency theory suggests that a high level of ownership concentration discourages investments that benefit managers by compensation and/or status, but puts shareholders at risk of underperformance (Fama & Jensen, 1983). Acquisitions are frequently occurring examples of such investments that may benefit managers at the expense of the firm’s shareholders (Morck, Shleifer, & Vishny, 1990). Scholars have suggested that concentrated ownership may help disciplining any faulty managers, even if there is a lack of legal protection in the home country environment (Shleifer & Vishny, 1997).
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ownership concentration may be a very effective governance mechanism for emerging market firms. A lot of emerging market firms are subject to high levels of ownership concentration (Lins, 2003). These firms are often arranged in the form of business groups to be able to benefit from and manage institutional voids because of lacking formal institutional mechanisms (Khanna & Palepu, 1998). Business groups are defined as a set of firms which is bound together by an arrangement of formal and informal ties that are used to taking coordinated action (Khanna & Rivkin, 2001). Previous literature argues that business group affiliation not only reduces risk (Khanna & Yafeh, 2007), but also improves profitability (Khanna & Palepu, 1998) and other performance outcomes (Khanna & Palepu, 2000). Business group affiliation may provide firms with advantages because it provides them with group-wide capabilities, reputation, resources, and more easy and broader access to domestic or foreign capital (Kim & You, 2013). Furthermore, interlocking directorates across business group-affiliated firms may be beneficial for the dissemination of information across firms (Burt, 1980). Board interlocks occur when a person in the board of a company also serves on the board of other corporations and thus creates a network or interlock between these different companies (Kim & You, 2013). These board interlocks may reduce vertical coordination and scanning costs (Bazerman & Schoorman, 1983), and serve as a tool to effectively diffuse innovation (Haunschild & Beckman, 1998). Executive directors’ external ties through these interlocks also increases the firm’s access to strategic information and opportunities (Pfeffer, 1991), which ultimately increases the board’s strategic decision making and performance (Kim & You, 2013).
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(Miller, Breton‐Miller, & Lester, 2010). Agency theorists even argue that the scale of acquisitions is inversely related to the degree of concentrated ownership (Amihud & Lev, 1999; Shleifer & Vishny, 1997). This could also mean that the acquisitions made by these firms may be more thought through and are more likely to have positive post-acquisition returns for the firm. The earlier discussed female board members’ monitoring capabilities and the unique and divergent opinions of a diverse board may, therefore, play an even bigger part in emerging market firms with higher levels of ownership concentration. Therefore, this study hypothesises as follows:
Hypothesis 3: The effect of gender diversity within emerging market firms’ board of directors on acquisition performance is positively moderated by ownership concentration.
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METHODOLOGY
Data
India is considered as an appropriate setting for this study, because of the increasingly frequent use of acquisitions as a crucial business strategy option, and since India is the second largest and the second fastest growing emerging economy in the world with a high level of diversity among its society in terms of culture, business models, industries, and firm ownership (Rani et al., 2016). Furthermore, the corporate governance structure in India obliges firms to appoint one or more female and independent director(s). The Indian legal and regulatory framework of corporate governance is comprised with the Ministry of Corporate Affairs (MCA), Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI) and Institute of Chartered Accountants of India (ICAI) (Routray & Bal, 2016). India’s corporate governance reform first started by establishing the Securities and Exchange of Board of India (SEBI) in 1992 (Routray & Bal, 2016). However, the ‘New Companies Act 2013’ has recently introduced more binding corporate governance norms (Routray & Bal, 2016). This bill results in more responsibility to the board and obliges firms to appoint at least one woman on Indian boards of directors. Furthermore, Clause 49 of the Indian listing agreement states that at least fifty percent of all board members in an Indian listed firm should be independent, if the chairman of the board is a fulltime executive-director (Routray & Bal, 2016).
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Detailed firm-specific data of large publicly listed firms’ board composition and corporate governance are manually collected from annual reports provided through the BSE and NSE website from the year 2010 until the year 2016. Considering the fact that the New Companies Act of 2013 states that Indian firms have an obligation to appoint at least one female director, this means that this provides the opportunity to ensure variation in the sample by including boards without female representation as well as boards with one or more female directors. Any missing or unclear data in Orbis or any annual report is complemented with information from news articles, which are retrieved from the LexisNexis database, and the Thompson Reuters database. The time period between 2010 and 2016 is used to be able to provide an event window which is big enough to compose a sizeable sample and to adequately answer the before mentioned research questions. The data collection resulted in a sample size of 158 acquisition deals made by 110 Indian firms. To better understand the included variables in this study, a conceptual model is provided in figure 1.
Figure 1. Conceptual Model
Variables and Measures
Acquisition performance
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Ireland, & Best, 1998; Kusewitt, 1985; Papadakis & Thanos, 2010; Ramaswamy, 1997; Zollo & Singh, 2004). Meeks and Meeks (1981) also concluded that ROA is the most appropriate measure for merger and acquisition performance compared to other accounting criteria like profit/sales ratio and return on equity. They argued that ROA is less influenced by the possibility of estimation bias.
Extant literature argues that post-acquisition returns need to be compared with pre-acquisition returns (Ramaswamy, 1997; Zollo & Singh, 2004). The common methodology for these studies is to compare the weighted average of the pre-bid returns of the acquisition target and the bidder firm to the reported post-acquisition returns of the combined firm (Ramaswamy, 1997; Sudarsanam, 2003). Therefore, the pre-bid ROA of the acquirer and the target one year prior to the acquisition deal and the post-bid ROA of the acquirer one year after the deal have been analysed. The pre-bid returns are weighted by taking the total assets into consideration of both the acquirer as well as the acquisition target.
Board gender diversity
Following recent literature, board gender diversity is computed as the ratio of total number of female directors to the total number of directors on the board (Sajjad & Rashid, 2015). This way, the gender composition of all municipalities’ board is coded for each year. Next, the variable gender diversity is calculated using the Blau index of dissimilarity. The Blau index is computed according to formula 1 (Opstrup & Villadsen, 2015):
Formula 1: Blau Index = 1 − ∑ 𝑝𝑝𝑝𝑝2, where p equals the proportion of each group of
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Board independence
Following recent research, this paper measures the proportion of board members who are independent by computing the outsider ratio as the ratio of independent outside directors to all directors (Duru, Iyengar, & Zampelli, 2016; Zona, 2016).
Ownership concentration
The independence indicator provided by Bureau van Dijk is used as a proxy in this research paper to measure the ownership structure of firms. The independence index uses values on a numerical scale from 1 to 9, which represents the amount of concentrated ownership for the researched firms. However, Bureau van Dijk only provides ownership data for the year of the latest observation of a firm. Nevertheless, this should not create a drawback for this research. Following earlier research, the sample is divided into two large categories (Krämer, 2015). Class A+B contains firms where no shareholder has a direct or total ownership above 50 percent of the shares. Class C+D contains the firms where one investor does have a direct or total ownership higher than 50 percent of the shares. So, ownership concentration is measured as a dummy variable where a firm can either have dispersed ownership (A+B) or concentrated ownership (C+D). Because of the roughness of this ownership measurement, a change in the ownership structure that would cause a shift between these two categories is very improbable. Different papers have argued that these shifts over time are not a serious concern in this context, since any misclassification as a result of an ownership shift is likely to bias the results towards zero (Budd, Konings, & Slaughter, 2005; Dharmapala & Riedel, 2013).
Control variables
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& Elango, 2016); (3) debt to equity ratio to control for capital structure (Hitt et al., 1997; Vermeulen & Barkema, 2002); (4) board size, as the total number of directors in the board, because this could influence firm performance (Kalsie & Shrivastav, 2016; Mohapatra, 2017); (5) CEO duality, showing 1 if the chairman of the board is also the CEO and 0 if the chairman and the CEO position of the firm differs (Kalsie & Shrivastav, 2016); (6) acquisition frequency, to control for the fact that some firms may have learned from previous acquisition experiences by including the number of acquisitions completed by the focal firm during the researched
period (Trichterborn, Knyphausen‐Aufseß, & Schweizer, 2015); (7) a dummy variable to
control for the fact that an acquisition is domestic or foreign (Nadolska & Barkema, 2014); (8) majority control, taking a value of 1 when the acquisition resulted in the acquiring firm exceeding a fifty percent stake in the target firm (Gubbi & Elango, 2016); (9) relatedness of the acquisition by comparing the NACE Rev. 2 codes of both the acquirer and the target firm, taking a value of 1 when both firms share one or more NACE Rev. 2 codes, since this is likely to influence the returns of an acquisition (Bruton, Oviatt, & White, 1994; Hayward, 2002); and, (10) year of acquisition as a dummy variable taking a value of 1 when an acquisition took place after 2013 and a value of 0 when an acquisition took place before or during 2013 in order to
control for changes in SEBI regulations in 2013.
ANALYSIS AND RESULTS
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of the included firms show signs of concentrated ownership, and 13 percent of the firms replaced the CEO during or around the acquisition period. Some outliers were detected in the dataset. These outliers were identified and dealt with by looking at the standardized values and winsorizing (Tukey, 1962) all Z-values above 2.5 and below -2.5. This resulted in a 3.2 percent winsorized dataset. The correlations of the included variables in this study are shown in table 2 of appendix B.
N Mean S.D. Min Max
Change in ROA 158 -0.946 5.617 -16.932 16.713
Board Gender Diversity 158 12.604 13.204 0.000 44.444
Board Independence 158 53.059 9.070 33.333 75.000 Ownership Concentration 156 0.25 0.434 0 1 Board Size 158 8.87 2.488 4 15 Firm Size 158 1,409,353.411 2,749,676.835 594.605 10,042,060.89 Debt-Equity Ratio 152 36.118 156.404 -105.109 804.528 Year of Acquisition 158 0.74 0.440 0 1 Firm Age 158 32.44 20.943 1 82 Acquisition Frequency 158 2.15 1.663 1 7
Relatedness of the Acquisition 158 0.47 0.501 0 1
Domestic/Foreign Acquisition 158 0.10 0.303 0 1
Majority Control 153 0.83 0.377 0 1
CEO Duality 158 0.28 0.453 0 1
Table 1. Descriptive Statistics
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Hypothesis 1 suggested a positive relationship between board gender diversity and the dependent variable. Model 2 shows a negative effect of board gender diversity, while Model 8 shows a positive effect. This may suggest that the positive effect of board gender diversity is contingent on the interaction of ownership concentration, but both effects in Model 2 and 8 are found to be insignificant.
Hypothesis 2 argued that board independence positively affects the dependent variable. Even though the effect of board independence seems to be lower in the final, seventh model, both model 3 and model 7 point in the direction that board independence negatively affects the dependent variable. However, none of the effects in model 3 and 7 are found to be significant and no significant effect is found for the combination of independent variables in model 4 as well.
Hypothesis 3 argued that the positive effect of board gender diversity on the dependent variable is positively moderated by ownership concentration. Both model 5 and 7 point out that the interaction effect of ownership concentration seems to be negative. However, this interaction effect is not supported by any level of significance.
The last hypothesis, hypothesis 4, suggests that the positive effect of board independence is positively moderated by ownership concentration. Model 6 shows that ownership concentration indeed does have a seemingly positive moderating effect, but board independence seems to have a negative effect on the independent variable. Again, none of the hypothesized effects are supported statistically by any level of significance.
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generalizability of the results to a broader population. So, in conclusion, no hypotheses are proven significantly in this study.
Robustness Check
To test the robustness of the results, acquisition performance has been measured following multiple additional procedures. In the initial analysis, Ramaswamy’s (1997) and Sudarsanam’s (2003) common methodology is followed by comparing the revenue weighted ROA of the acquirer and the acquisition target one year prior to the acquisition with the ROA of the acquirer one year after completion of the acquisition. Given the importance of an accurate measurement, this robustness check also follows 1) a more recent example by Field and Mkrtchyan (2017) that does not include the acquisition target’s pre-acquisition performance; 2) Haleblian & Finkelstein’s approach (1999) who measured acquisition performance as the difference between pre- and post-acquisition performance, while using industry weights as well as revenue weights to correct for the influence of an industry (using the median industry ROA value of all Indian firms in the same NACE Rev. 2 code as the acquiring firm and/or the acquisition target); and, 3) an alternative accounting-based measure by including return on equity (ROE) instead of return on assets (ROA) (Sharma & Ho, 2002).
Furthermore, the research sample has been split in different sub-samples. First of all, domestic and foreign acquisitions are split into two different samples, as they may differ in terms of performance because, 1) lessons learned from domestic acquisitions may not be applicable in cross-border acquisitions and may be inappropriately generalized (Haleblian & Finkelstein, 1999); 2) a foreign market is generally subject to different institutional influences (North, 1991); and, 3) cross-border acquisitions may have different motivations than domestic acquisitions (Gubbi & Elango, 2016).
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change in regulations may have significantly changed the effects of both independent variables (board gender diversity and board independence) on the dependent variable. Thus, the sample is divided into a sub-sample with only acquisitions that took place before the change in SEBI regulations in 2013 and a sub-sample only including those acquisitions that took place after the change in regulations.
The different sub-samples are analysed with all four measurement procedures, which includes those used in the initial analysis as well as those introduced in this robustness check. The robustness check resulted in two significant models that were both found within the sub-sample of acquisitions made before the change in SEBI regulations in 2013. Model 1 of appendix C shows the statistic results of the analysed sub-sample when using the accounting-based performance measurement procedure of the initial procedure which measures the weighted pre-acquisition performance of both the acquisition target and the acquirer one year prior to the acquisition and compares it with the post-acquisition performance of the acquirer one year after the completion of the acquisition. Besides from the fact that the influence of different control variables on the dependent variable have been significantly proven, this model found significant evidence for hypothesis 4. This suggests that ownership concentration indeed positively moderates the effect of board independence on acquisition performance with a
coefficient of 1,778 (p: 0.005). No other hypotheses have shown significant results in model 1.
Model 2 of appendix C analyses the same sub-sample while including industry weights to the measurement procedure of the dependent variable. Again, significant evidence is found for the effect of multiple control variables on the dependent variable and most importantly, this model
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CONCLUSION
Discussion and Implications
This study examines whether a board’s composition in terms of independence and gender diversity influences the firm’s acquisition performance. No significant effects have been found in favour of the hypothesized arguments in the initial analysis. However, the robustness check did result in support for hypothesis 4 which suggests that the influence of the level of independence amongst board members on acquisition performance is positively moderated by the level of ownership concentration within the firm. Nevertheless, the support for hypothesis 4 has only been found in a sub-sample including acquisitions that took place before the change in SEBI regulations in the year 2013.
An explanation for the absence of any significantly strong link between board gender diversity and acquisition performance is because much of the compliance of Indian firms to gender quotas in the New Companies Act of 2013 happens by adding female grey directors with family ties (Saeed et al., 2017). Grey directors with family ties within the firm are likely to be less objective, and therefore don’t contribute much to the board’s monitoring function. In this case, it is likely that the benefits of having a gender diverse board don’t apply and don’t affect the firm’s acquisition performance.
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Obviously, it is unclear why any strong relationship between board gender diversity and acquisition performance is missing, since multiple factors may influence this relationship. Women that get elected to corporate boards of directors may in fact have similar values, experiences and knowledge in comparison with men. So, any positive influence of gender diversity positively affecting acquisition performance resulting from the assumed cognitive differences between men and women could in fact be missing, since both male and female board members are likely to be appointed based on professional experiences and competencies (Klein, 2017). Furthermore, even if women on corporate boards increase cognitive variety amongst board members, they may lack influence to actively change or influence board decisions during board meetings, since they could be considered as minorities in the group of directors (Klein, 2017).
The absence of a strong link between board gender diversity and acquisition performance could also be caused by the inherent ills of diverse teams (Jhunjhunwala & Mishra, 2012). According to social research, diversity in teams may adversely affect processes. Different attitudes and viewpoints could increase conflict within the board, which in turn reduces cohesion and disturbs coordination and communication within the board (Jhunjhunwala & Mishra, 2012). Furthermore, an effective and diverse board must exist out of the right mix of people, implying that more diversity factors are of influence besides a person’s gender (Ben‐ Amar, Francoeur, Hafsi, & Labelle, 2013). It is therefore possible that gender diversity alone is not enough to influence firm performance, but the combination of diversity factors could.
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mechanism for emerging market firms. As a practical implication, this could suggest that the importance of board independence is even higher for developing market firms, since the level of ownership concentration is usually higher in a developing market context considering the large amount of business groups in India as well as many other developing countries.
However, there are complications for the generalizability of the results, since no significant influence was found in the years after the change in regulations in 2013. This adds to the recent discussions in academic literature, and raises new questions regarding the effect of regulating a board’s composition, since regulation may have big influences on firm performance without being intended. Thus, balance in the regard of gender and independence may be difficult to achieve with just regulations and quotas, which in turn has implications not only for acquiring firms but also for regulating authorities.
La Porta, Lopez-De-Silanes, Shleifer, and Vishny (1998) found proof for the fact that firms with a high level of concentrated ownership are more common in countries where the legal system does not effectively protect shareholders' rights and, thus, less common in countries with effective external governance mechanisms. In line with the positive moderation effect shown in model 1 and 2 in appendix C, this could suggest that the advantages of concentrated ownership as an internal governance mechanism in an emerging context do no
longer apply, or at least decrease, when external control mechanisms are introduced.
Limitations and Future Research
30
India as a research context could also be debatable, especially when looking at the role of the independent directors after the Indian Satyam scam. Clearly, independent directors need sound judgment and an inquiring mind to fulfil their controlling function. However, in the case of Satyam, independent directors were selected to act in favour of the executives instead of the shareholders, which harmed the firm’s internal monitoring and communication towards shareholders (Brown, Daugherty, & Persellin, 2014), even though five of the nine directors in Satyam’s board were considered to be independent, which totally complies with the prescribed regulations in India (Madhani, 2015). This could suggest that board composition and the effects of governance codes are much harder to research in an emerging country context, and maybe less reliable, which could have something to do with the lower developed institutional context. The fact that directors can officially be seen as independent, while practically being ‘promoters’, might point in the direction that the observed level of independence in a board may be different in practice, therefore possibly making the results of this study questionable.
Future studies must further explore this relationship, especially by researching other emerging markets as well. Furthermore, this study focuses on accounting based measures of firm performance, while other performance measures, like market based measures, could also further deepen our understanding of the actual influence of gender diversity as well as board independence within boards and the entire firm. Another possible limitation of this study is that, many other factors could be of importance for a firm’s board composition besides the gender diversity and independence variables included in this study (Hillman & Dalziel, 2003). So, other factors of a board’s composition still may or may not have an influence on acquisition performance or other firm performance outcomes, regardless from this study’s results.
31
are still to be discovered. Lastly, a deeper understanding is needed regarding the effect of introducing external governance mechanisms on the influence of internal governance mechanisms in an emerging market context, and the consequences it has for internal control or particularly a board’s composition.
ACKNOWLEDGEMENTS
I would like to express my sincere gratitude to all the people who were involved in writing this paper. Special thanks go to my supervisor, dr. Sathyajit Gubbi, for his valuable guidance throughout this entire process. Furthermore, I would like to express my gratitude towards those who stood by me during my studies, and during the writing of this paper in particular. Lastly, I also want to thank dr. Melih Astarlioglu, for co-assessing and reading this paper.
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APPENDIX A: ASSUMPTION CHECK
There are different widely accepted assumptions, which have to be considered when performing a multiple regression analysis. First of all, the dependent and independent variables need to show a linear relationship, which is confirmed by analysing a plot including the standardized residuals and the predicted values of the dataset. Secondly, multiple regression analysis has the assumption that the variables have a normal distribution. Figure 2 shows that the used dataset seems to be more or less normally distributed. This is statistically tested by dividing the skewness value with the kurtosis value, which did not result in a Z-value higher or lower than 1.96 or -1.96 respectively. The null hypothesis of a normally distributed dataset is therefore not rejected.
Figure 2. Histogram of the distribution
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Furthermore, multicollinearity is statistically tested with the VIF function in SPSS, and all values are proven to be within the recommended limits with a score of 1.554 as highest correlation value amongst the included variables.
44
