Internal governance and the correction of managerial error: Evidence from corporate restructuring following bad acquisition bids

This study identifies a sample of firms announcing value-decreasing acquisition bids over the 1982–1996 period. It examines whether board and ownership structure influences the likelihood that the bid will be completed and that corrective asset restructuring will take place subsequent to the bid. The results support the arguments of Jensen (1993) that smaller board size and greater board independence benefit shareholders. Board size is positively related to the probability of bid completion and negatively related to the probability of asset downsizing following the bid. In addition, the degree of board independence, measured by the percentage of non-executive directors on the board that have no business or family ties to management, is negatively related to the likelihood of bid completion and positively related to the likelihood of asset downsizing. There is also evidence that high managerial stock ownership deters the completion of a bad bid.;The study complements and extends existing research that focuses on managerial and disciplinary responses to poor firm performance. It contributes to this literature by demonstrating a relation between internal governance systems and managerial responses to poor acquisitions. The results of the study suggest that managerial error does not necessarily signal internal governance failure. Rather, internal governance distinguishes firms that take corrective action following bad acquisition bids from those that do not.