Is there a “Dark Side” to Monitoring? Board and Shareholder Monitoring Effects on M&A Performance Extremeness

• Date: 01 November 2017
• Published date: 01 November 2017
• Author: Cheryl A. Trahms,Maria L. Goranova,Hermann A. Ndofor,Richard L. Priem
• DOI: http://doi.org/10.1002/smj.2648

Strategic Management Journal

Strat. Mgmt. J.,38: 2285–2297 (2017)

Published online EarlyView 28 March 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2648

Received 27 July 2012;Final revisionreceived 17 January 2017

Is there a “Dark Side” to Monitoring? Board

and Shareholder Monitoring Effects on M&A

Performance Extremeness

Maria L. Goranova,1*Richard L. Priem,2Hermann A. Ndofor,3and

Cheryl A. Trahms4

1Organizations & Strategic Management, Sheldon B. Lubar School of Business,

University of Wisconsin– Milwaukee, Milwaukee, Wisconsin

2Management, Entrepreneurship and Leadership Department, Neeley School of

Business, Texas Christian University, Fort Worth, Texas

3Management and Entrepreneurship, Kelley School of Business, Indiana University,

Indianapolis, Indiana

4Management, College of Business, Minnesota State University, Mankato,

Minnesota

Research summary: We investigate the effects of monitoring by boards of directors and

institutional shareholders on merger and acquisition (M&A) performance extremeness using

a sample of M&A deals from 1997 to 2006. Both governance research and legal reforms

generally have espoused a “raise all boats” view of monitoring. We instead investigate whether

monitoring may serve as a double-edged sword that limits CEO discretion to undertake both

value-destroying M&A deals and value-creating ones. Our ndings indicate that the relationship

between monitoring and M&A performance is more complex than previouslybelieved. Rather than

“raising all boats” in a shift towards better M&A outcomes, monitoring instead is associated with

lower M&A losses, but also with lower M&A gains.

Managerial summary: Mergers and acquisitions (M&As) are a quintessential corporateactivity.

There were $3.8trillion worth of M&A deals in 2015, despite scholars and practitioners reporting

that M&As often perform poorly. We question the widespread belief that more vigilant monitoring

by boards of directors and large shareholders will raise M&A performance, overall. Put

differently,does monitoring constrain CEOs’ discretion to pursue bad deals, while simultaneously

encouraging them to pursue good ones? Wend that monitoring limits both large M&A losses and

largeM&A gains. Contrary to widely held beliefs, our results indicate that constraining executives’

ability to pursue value-destroying M&A deals does not simultaneously encourageor enable CEOs

to pursue value-creating deals. Copyright © 2017 John Wiley & Sons, Ltd.

Introduction

After more than two decades of governance

reforms addressing questionable corporate prac-

tices and shareholder discontent (Stout, 2012),

scholars and practitioners continue to call for

Keywords: corporate governance; M&A performance

extremeness; monitoring; board of directors; institutional

shareholders

*Correspondence to: Maria L. Goranova, Sheldon B. Lubar

School of Business, University of Wisconsin-Milwaukee, 3202

N. Maryland Ave, Milwaukee, WI 53201-0742. E-mail: gora-

nova@uwm.edu

Copyright © 2017 John Wiley & Sons, Ltd.

greater accountability of CEOs to rm shareholders

(Bebchuk, 2005, 2013). Nowhere is the need for

accountability more evident than in the context of

mergers and acquisitions (M&As), as extensive

prior research reports that M&As fail to create

shareholder value and often destroy it (Datta,

Pinches, & Narayanan, 1992; King, Dalton, Daily,

& Covin, 2004). Moeller, Schlingemann, and Stulz

(2005) estimate that acquiring rms’ shareholders

lost twelve cents for each dollar spent on M&As.

Such losses, however, do not prevent executives

from personally beneting from acquisitions

(Harford & Li, 2007). Moreover, M&As often