Impact of Corporate Governance Score on Short-Term Performance of Mergers and Acquisitions

The present study attempts to investigate whether differences in the quality of firm level corporate governance influence short-term performance of acquiring firms for a sample of companies by creating a corporate governance index. The study is based on a survey of sample of 155 companies having completed mergers and acquisitions deals announced during January 2003 to December 2008. We document a positive relationship between corporate governance score and short-term abnormal returns by constructing broad corporate governance Index (CGI) for Indian public listed companies.We use a broad, multi-factor corporate governance score, which is based on the responses to objective survey questions supplemented with interviews of senior management, directors, CFOs, board members, company secretaries, compliance officers, and investor relation officers. The questionnaire is designed on the basis of major standard qualities relevant to measure the corporate governance. The present study concludes that companies with higher rank for corporate governance score have better short-term performance which is revealed from positive and higher abnormal returns during the event windows. A strong correlation has been observed between the returns of cross-border acquisitions financed with cash payments. Regression results indicate that board size has negative and CEO equity has positive impact on short-term performance of acquiring firms. Large size board hinders effective communication and delays decision making; are less likely to monitor effectively. It seems that large fraction of equity stake owned by CEO align shareholders' interest with managers' interests and minimize agency problems