Does shareholder voting reduc the risk of destruction of value in acquisitions?

Corporate acquisitions can be ruinous for shareholders and have caused some of the largest bankruptcies in U.S. history. Extensive empirical evidence documents that a large percentage of M&A destroys value for shareholders. Conflicted or overconfident managers take excessive risks in acquisitions. In this project we study shareholder voting as a governance tool that might reduce the risk of such corporate disasters. Boards and managers are prevented from acting autonomously.

They have to seek shareholder approval before taking decisions that can have large and adverse material consequences for the owners of the firm. Previous empirical studies are inconclusive because shareholder approval in the US is not mandatory; boards can avoid a vote for transactions of any size. We overcome this endogeneity problem by focusing on the UK setting where shareholder voting on significant acquisitions is mandatory. The UK Listing Rules require a vote if the company acquires an asset that is relatively large (exceeding 25 percent of the value of its existing assets). These acquisitions are called Class 1 transactions. The smaller Class 2 transactions do not require a shareholder vote. This project will examine the use of Class 1 transactions and its impact on the performance of acquisitions by comparing Class 1 and Class 2 transactions in the UK. A comparison will also be drawn between the performance of Class 1 transactions in the UK and large acquisitions (bigger than 25%) in the US where the vote is not mandatory.

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