Cancelled Acquisitions, Market Information, and Corporate Governance

We find that the decision by a potential acquirer to complete or cancel an announced acquisitionproposal is sensitive to new information generated after the announcement of the acquisition.Both the acquirer and target’s cumulative abnormal returns (CAR) over different windows afterthe announcement date predict the probability of completion of the acquisition. We partition thesample into two sub-samples based on whether or not the same individual holds the positions ofboth the CEO and the Chairman of the board in the acquiring firm, and compare the above results.Consistent with the arguments of Samuelson and Rosenthal (1986), in both sub-samples, targetCARs predict the completion probability. However, the acquirer CARs are positively related tothe completion probability only for the sub-sample in which different individuals hold thepositions of CEO and board Chairman. These latter results are consistent with the view that whenthe same individual holds both positions, the board is less effective in monitoring the CEO, andmanagerial objectives are likely to drive acquisition activity (Lang, Stulz and Walkling (1991),Morck, Shleifer and Vishny (1990)). Deal cancellations also have significant impact onsubsequent disciplinary events – but only for firms without independent leadership structure. Thissuggests that cancellations represent a more fundamental change in the way the company isgoverned for these firms, and are possibly imposed on management....