Officers’ fiduciary duties and acquisition outcomes

Syed Walid Reza

The Financial Review, 2020, vol. 55, issue 1, 91-119

Abstract: Using a Delaware case law that recognized officers’ distinct fiduciary duties for the first time in 2009, I examine the effect of officers' fiduciary duties (OFDs) on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement‐period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value‐decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.

Date: 2020
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