Co-opted boards and bidder performance

Purpose - Defining co-opted directors as those who join a company's board after an incumbent chief executive officer assumes office, this study aims to investigate the influence of co-opted boards on bidder performance. Design/methodology/approach - This study applies ordinary least squares regression analyses to a sample of 8,939 acquisition observations announced by US firms spanning the 1999-2019 period. Event study methodology was employed to capture the market response to acquisition announcements. Propensity score matching technique, a two-stage least squares instrumental variable approach and model selection through the Lasso method were performed for robustness and endogeneity correction purposes. Findings - The results depict a significant negative relationship between a co-opted board and return to acquirers, suggesting that managers under co-opted boards make value-destructing Mergers and Acquisitions deals. We also show that the relationship between board co-option and acquisition performance is positively moderated by institutional ownership while being negatively moderated by an entrenched board. Our additional tests reveal that board co-option reduces acquisition efficiency and leads to worse financial performance. Practical implications - This study offers important implications for regulators and policymakers by highlighting how poor monitoring of the board of directors can influence announcement returns. Originality/value - To the best of the authors' knowledge, this paper appears to be the first investigation that makes a link between board co-option and various dimensions of acquisition decision.