Academic journal article International Journal of Business

Internal Corporate Control and the Dynamics of Post-Acquisition Boards: Evidence of U.S. Life Insurers

Academic journal article International Journal of Business

Internal Corporate Control and the Dynamics of Post-Acquisition Boards: Evidence of U.S. Life Insurers

Article excerpt


We study the role of target insurer boards and the post-acquisition retention of target directors in U.S. life insurer mergers and acquisitions. Our results indicate that board characteristics affect the likelihood of acquisition. Smaller boards, boards with better reputations and boards without CEO dominance are more likely to agree to acquisition. Boards with a larger proportion of outside directors are less likely to agree to acquisition, especially when firms perform well. In terms of post-acquisition director retention, we find that outside directors are more likely to lose their seats after acquisition, especially when firms underperform. Directors holding more directorships in other firms or having experience as top management are more likely to be retained. Outside directors are less likely to be retained if they are from a firm with CEO duality, and inside directors are more likely to be replaced if the takeover is disciplinary.

JEL Classifications: G22, G30, G34

Keywords: mergers and acquisitions: board of directors; life insurers


A large number of mergers and acquisitions (M&As) have been observed in the U.S. insurance industry in the past decade. In general, these transactions are found to enhance the value and improve the efficiency of target firms (Cummins et al., 1999; Cummins and Xie, 2008, 2009; Boubakri et al., 2008). Meanwhile, the literature on corporate governance shows that directors of target firms face board seat loss and a negative financial impact after M&As (Kini et al., 1995; Becher and Campbell, 2005; Harford, 2003). This raises questions about the role and fate of target firm boards in the M&A process. What types of boards are more likely to agree to value enhancing takeovers? Are certain types of directors more likely to be retained in post-acquisition firms than others? Despite the rich literature on takeover and corporate governance, few studies tackle the retention of post-acquisition boards, and none focus on the insurance industry in particular.

Unlike non-financial firms that are solely monitored by non-regulatory groups, insurance companies are monitored by both regulators and non-regulatory groups. (1) It then becomes interesting to examine whether the non-regulatory groups monitor insurance companies in the same way as they do non-financial firms. In particular, we study the role of target boards in acquisition decision making and the post-acquisition dynamics of these boards in the U.S. life insurance industry. We first investigate whether the corporate governance of a company affects its likelihood of being acquired. We then examine the characteristics of target company directors and whether these characteristics will determine their retention after a takeover.

This study contributes to the M&A and corporate governance literature in several important ways. First, the study improves the understanding of the role played by the board of a target company during the M&A process in the insurance industry Despite the importance of a board's role in an M&A, surprisingly little research has been conducted to examine that role in the insurance industry, with the exception of Boubakri et al. (2008), which examines the influence of corporate governance on the long run performance of bidders in the property and liability insurance industry. Our study investigates the influence of the target company board on the likelihood of successful acquisition. Since hostile takeovers in the insurance industry are rare and difficult to carry out due to regulatory hurdles, (2) the role of corporate governance in the target company may be different from that of other industries (Shivdasani, 1993), further contributing to the significance of this study. Additionally, using homogenous insurance companies as our sample allows us to investigate the role of corporate governance without cross-industry contaminations, avoiding possible spurious correlations caused by unobservable differences across industries. …

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