Fight or flee: Outside director departures prior to contested management buyout offers

Matteo P. Arena, Michaël Dewally and Sarah W. Peck

Corporate Governance: An International Review, 2020, vol. 28, issue 5, 274-293

Abstract: Research Question/Issue We investigate outside director departures prior to management buyout offers (MBOs). In these transactions, managers have both an information advantage and incentives to make a lowball offer to shareholders. Outside directors can safeguard against managerial self‐dealing by negotiating for the best terms for public shareholders from either management or another bidder. Research Findings/Insights It is typical that outside directors stay on the board through an MBO offer as MBOs are less likely to have changes in directors—either joining or leaving—relative to a control sample. After controlling for endogeneity as well as firm and director characteristics, we find that outside directors are more likely to leave when the offer is later contested. We do not find any evidence that departing directors are replaced by new outside directors who ensure shareholders get a higher premium nor do we find any evidence that the board acts as a public auctioneer. We also find that outside directors are more likely to depart when the buyout contest is longer. Our findings show that outside directors provide a weak internal monitoring mechanism as they leave precisely when shareholders need their expertise the most. Theoretical/Academic Implications Our results contribute to research that supports the notion that outside director departures are symptomatic of board weakness. The results of our study support the contention of other researchers that outside directors often fail to monitor managers. Practitioner/Policy Implications Our study offers useful information to M&A investment banking advisors and leverage buyout analysts by showing the mechanisms under which director turnover can affect the value and the outcome of MBOs.

Date: 2020
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