Expertise on Boards and the Market for Directors with Acquisition Experience

This dissertation studies expertise on boards with a particular focus on directors with experience in mergers and acquisitions. The three essays focus on acquisition experience on boards of directors, the recruitment of these experienced directors from the director labor market, and the effects of this experience on acquisition outcomes. In the first chapter, I study whether firms construct boards that are consistent with the firm’s expertise needs. I document significant differences between the boards of acquiring firms and non-acquiring firms. Acquiring firms are more likely to have an independent director with acquisition experience, compared to non-acquiring firms. They often have more than one and their slate of independent directors with acquisition experience is not only bigger but also composed of directors who have been involved in larger deals relative to the non-acquiring firms. Firms that are frequent acquirers and ones engaging in large acquisitions have even deeper experience on their boards. I also find that non-acquiring firms with severe agency problems tend to have fewer directors with acquisition experience, but this result does not obtain in acquiring firms. These results suggest that firms construct boards that are consistent with the firm’s expertise needs. The second chapter studies the recruitment of directors with acquisition experience. These directors tend to join large firms that already have an abundance of experience on the board. Firms with severe agency problems systematically recruit directors who have been involved in value-decreasing acquisitions and this result is largely driven by acquiring firms. These results suggest that there is a systematic market for bad directors and therefore offers an agency explanation for the absence of ex-post settling up in the director labor market for directors with acquisition experience that has been documented in prior literature. In the final chapter, I study the effects of acquisition experience on the board on acquisition outcomes. I show that independent directors with experience as CEOs of other acquiring firms improve shareholder value in deals involving public targets but only if they are high quality directors. Independent directors with experience on the boards of other acquiring firms do not improve value. Firms with low quality directors pay higher premiums to the target firm shareholders. Firms with acquisition experience complete more deals, including deals in which the acquirer returns are negative. I also find some evidence that bonuses paid to the acquiring firm CEOs are highest when the boards have low quality directors. Overall, the results suggest that shareholders of acquiring firms may have better outcomes with no experience on the board, than with low quality directors.

Many thanks to Tirimba’s committee: Chair: Dr Samuel Szewczyk, Associate Professor Co-Chair: Dr. George Tsetsekos, Francis Professor of Finance Member: Dr. Michael Gombola, Professor Member: Dr. Jie Cai, Associate Professor Member: Dr. Seung Hee Choi, Associate Professor, The College of New Jersey