Corporate Governance and Firm Survival

Date01 May 2018
Published date01 May 2018
The Financial Review 53 (2018) 209–253
Corporate Governance and Firm Survival
M. Sinan Goktan
California State University – East Bay
Robert Kieschnick
University of Texasat Dallas
Rabih Moussawi
Villanova University
We explore how various aspects of corporate governance influence the likelihood of a
public corporation surviving as a separate public entity,after addressing potential endogeneity
that arises from competing corporate exit outcomes: acquisitions, going-private transactions,
and bankruptcies. We find that some corporate governancefeatures are more important deter-
minants of the form of a firm’s exitthan many economic factors that have figured prominently
in prior research. We also find evidencethat outsider-dominated boards and lower restrictions
on internal governance play major roles in the way firmsexit public markets, particularly when
a firm’s industry suffersa negative shock. Overall, our results suggest that failure to recognize
competing risks produces biased estimates, resulting in faulty inferences.
Keywords: corporate governance, acquisitions, going private, bankruptcy, corporate restruc-
JEL Classifications: M40, M48, G33, G34
Corresponding author: Villanova University, Villanova School of Business, 800 Lancaster Avenue,
Villanova,PA 19085; E-mail:
The authors wish to thank the anonymous referee, the Editor Srini Krishnamurthy and participants in
the SEC Financial Reporting Conference, the Southern and Eastern Financial Association meetings, the
Financial Management Association meetings and seminars at the University of Texas at Dallas and at
University of Texasat San Antonio for helpful comments. Goktan gratefully acknowledges the support of
the Jack and Susan Acosta Professorship at California State University – East Bay.
C2018 The Eastern Finance Association 209
210 M. S. Goktan et al./The Financial Review 53 (2018) 209–253
1. Introduction
Corporations with publicly traded stock exit these markets by either being ac-
quired by another operating company, being acquired by a private equity firm, or
going bankrupt. All prior published studies of the effect of corporate governance on
the likelihood of a firm exiting public equity markets in one of these three ways has
failed to address two issues that raise concerns about their findings. First, these studies
fail to recognize that these outcomes are competing risks. Second, these studies fail
to address the possibility that the corporate governance measures that they use might
be endogenous variables in their regression models. The purpose of this study is to
address both of these issues and so add to the literature an enriched understanding of
how corporate governance influences the likelihood of these outcomes.
The fact that these three forms of corporate exits are competing risks should be
clear to anyone that reads the business press. For example, one finds news stories of
firms receiving competing bids from other operating companies and private equity
firms. As a result, some prior research (e.g., Halpern, Kieschnick and Rotenberg,
1999) has examined what factors significantly influence the likelihood of a firm
going private rather than being acquired by another operating company. On a different
note, even though Stiglitz (1972) points out that being acquired by another operating
company and going bankrupt, are alternatives for one another, less research attention
has been given to this choice.1Yet this choice occurs frequently enough to raise inter-
esting regulatory issues2as pointed out by Heyer and Kimmel (2009). The key point
is that these outcomes are competing risks, and according to the statistics literature
on competing risks (e.g., Crowder, 1991), the failure to recognize them as such in
probability models produces parameter and standard error estimates that are biased.
Separate from the above issue, our review of prior research on the determinants
of each of these outcomes reveals that they ignore the possibility that the corporate
governance measures they use might be endogenous variables in their estimated
choice models (see Appendices A, B, and C for reviews of each of this research). The
failure to address this issue in prior research raises questions about the conclusions
drawn from such research since it is quite possible that the corporate governance
features that they consider are correlated with omitted variables (managerial quality,
etc.) that influences how their firms exit public equity markets.
Consequently, the focus of this study is on examining how corporate gover-
nance influences the likelihood of a corporation being acquired by another operating
1Notable exceptions to this lack of empirical attention are Pastena and Ruland (1986) and Meier and
Servaes (2014).
2For firms facing serious financial distress, once financing becomes more readily available to potential
acquirers we might expect an increase in both the number and share of mergers where at least one of
the parties is having difficulty staying afloat independently.The merger then becomes an anticompetitive
merger where the target that could have a chance to float independently failsafter the merger, leading to a
reduction in market competition.
M. S. Goktan et al./The Financial Review 53 (2018) 209–253 211
company,going private, or going bankrupt while both recognizing that these are com-
peting risks and recognizing the potential endogeneity of their governance features
to these outcomes. Further, we address whether firms change their corporate gover-
nance features in expectation of a possible form of exit. Alternatively, we examine
whether certain corporate governance features are correlated with omitted variables
that influence the form of exit (e.g., CEO ability). To the best of our knowledge, our
study is the only study to explore these issues.
To conduct our analysis, we use all U.S. corporations from 1997 through 2004
with sufficient data on the variables of interest. Based on these data, we findevidence
for severalmajor conclusions. First, consistent with the statistics literature, we provide
evidence that probability models for the likelihood of a firmbeing acquired by another
firm, or going private, or going bankrupt that ignore the competing risks produces
different estimates of their parameters and standard errors from a probability model
that recognizes the existence of such competing risks.
Second, we find evidence that severalcorporate governance features are endoge-
nous variables in regression models that estimate the probability of a corporation
going private, or being acquired, or going bankrupt. We identified 50 studies that
examine the various factors on the likelihood of a firm being acquired, going private,
or going bankrupt, yet none considers this possibility. Based on an analysis of gover-
nance changes prior to these events, it is unlikely that these endogeneity concerns are
raised by changes in their governance features prior to these events. Rather,it is more
likely that these concerns arise because of their correlation with omitted factors. The
most obvious omitted variables are associated with the quality of the firm’s CEO or
its management team. Regardless, by comparing evidence from probability models
that account for such endogeneity to those that do not, we demonstrate the importance
of addressing endogeneity in these regression models.
Third, after accounting for endogeneity concerns, we find that firms with rel-
atively less independent boards and management teams with a larger share of their
firms’ stock are more likely to go private. This link between insider control and the
higher likelihood of going private is inconsistent with Bharath and Dittmar (2010) but
is supportive of the evidence in Halpern, Kieschnick and Rotenberg (1999) for U.S.
firms and Weir, Laing and Wright (2005a) for U.K. firms. To confirm our findings,
we examine the impact of various governance features in detail and find that firms
with limits on amending their corporate charter with confidential voting, unequal
voting, an anti-greenmail provision, directors’ duties provision, pension parachute,
and silver parachute provision are less likely to go private. Interestingly, the presence
of shareholder restrictions in the corporate charter and/or bylaws makes going-private
transactions less likely. Together these pieces of evidence suggest that control and the
ability to exercise it without outside shareholder influence are critical to why these
firms go private.
Fourth, after accounting for endogeneity concerns, we find a number of different
results on how corporate governance influences the likelihood of a firm being ac-
quired. For example, we find that the stock ownership of insiders is not a significant

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