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This paper is the first to investigate the effect of firm governance characteristics on takeover premiums and returns using an industry-adjusted corporate governance measure. We demonstrate that the worse the governance characteristics of the target firm are, relative to the industry average, the more its efficiency is improved by the acquisition, and the greater the synergistic gains and target’s return are at the announcement of an acquisition. The study also finds a positive relation between the acquirer’s governance characteristics and the combined returns, supporting the management entrenchment hypothesis. Unlike prior research that does not control for industry average governance index, we do not find a relation between acquirer returns and the industry-adjusted governance characteristics of the acquirer or the target. Our results advocate the notion that firm-specific governance partially explains the returns of a merger as industry-specific characteristics play a major role in the determination of corporate governance quality.

Does industry-adjusted corporate governance matter in mergers and acquisitions?