The Impact Of Board Networks On The Wealth Effect Of Mergers And Acquisitions

In recent years, board networks between corporations is becoming more and more popular, M&A events is increasing year by year and Wealth Effects of M&A is affected by information asymmetry risks greatly. Whether board networks can influence M&A wealth and how to influence has attracted wide attention of scholars at home and abroad, but they have not get consistent results due to different samples and indicators selected. Based on the view that board networks can reduce information asymmetry, this paper studies the influence of board networks on the wealth of acquiring and target firms. In this paper, we consider that better network boards have access to important information via their networks that makes them more informed in their monitoring and decision-making capacities, bring higher value to the enterprise. M&A behavior, as an economic act, faces lots of risks. Board networks are efficient ways to deliver information prior, concurrent or posterior M&A event; which can break the limitation of mastering two sides’information and thus weaken the information asymmetry risk and improve the wealth effect.At the same time, state-owned enterprises dominate our economy for a long period of time. Government as the ultimate controller of the business is an important way to regulate economy and government intervention in M&A activity is an important way of allocation of resources. In the state-owned enterprises, it is the government that decided the appointment and re-designation and board networks of our country contains the shadow of government. As a result, study ignoring the existence of special political background in our country is incomplete.Briefly, this paper combines the board network and the acquisition theories, focusing on whether board network could have influences on the wealth effect of mergers and acquisitions of listed companies through decreasing risks of asymmetric information and further analyses the different impacts by the different kind of ultimately controllers on the preceding influences. We use2401M&A events happened during2007to2011. Centrality indexes (degree, betweenness, closeness, eigenvector) have been used to measure board networks and three-day cumulative abnormal returns to measure the wealth effects of M&A events. Three-day Cumulative Abnormal Returns(CAR3) is calculated based on CAPM model to measure the changes of the shareholders value in company after the acquisition For the measurement of information asymmetry, we follow the rating standard of information disclosure of Shenzhen Stock Exchange to classify the Shenzhen Stock Exchange listed companies of our sample into four classes—excellert,fine, qualified and below standard. Particularly, the first two classes are combined into one subsample which face less information asymmetry, and the after two classes are combined into another subsample, which face stronger information asymmetry and rely more on their board networks. Meanwhile, referring to the existing literatures, the ultimate controller of enterprises is divided into three categories of state-owned, and below the provincial level as well as non-state. At the same time, given the outliers in our sample, we choose median regression for our test.The conclusion is that in the process of acquiring firms approaching the center of the board networks, its wealth increases at first but then decreases after reaching an optimal point; the marginal value of the information obtained through board networks decreases with too busy boards, that is, the relationship between acquiring firms and their wealth presents an inverted U-shaped relationship. However, just changing the target firms’position in the networks, their wealth does not increased remarkably; only high-quality information can play a positive role in their wealth. In the further examination of the board networks’impact on the reduction of the information asymmetry, we find that the lower quality of information disclosure is, the more significant effects of the board networks are; nevertheless, in the target firms with poor quality of information disclosure, information via board networks does harm to their wealth. In addition, to examine whether board networks lead to information leak before M&A events, we introduce variable of information leak rate for robustness test and find that our results have not been affected by information leak. What’s more, the role of government can be communicated to the company through director network, especially in terms of information flow, government and director networks can work in a complementary way; in the other word, director network can also be regarded as a way of government intervening company’s mergers and acquisitions activities.