failed takeover attempts, corporate governance and refocusing

Strategic Management JournalStrat. Mgmt. J., 24: 87–96 (2003)

Published online 11 October 2002 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.279

RESEARCH NOTES AND COMMENTARIES

FAILED TAKEOVER ATTEMPTS, CORPORATEGOVERNANCE AND REFOCUSING

SAYAN CHATTERJEE,1* JEFFREY S. HARRISON2 and DONALD D. BERGH3

1 Weatherhead School of Management, Case Western Reserve University, Cleveland,Ohio, U.S.A.2 School of Hotel Administration, Cornell University, Ithaca, New York, U.S.A.3 Smeal College of Business Administration, Pennsylvania State University, UniversityPark, Pennsylvania, U.S.A.

Hostile takeover attempts oftentimes signal that a target firm has an over-diversified andineffective corporate strategy. What does this signal mean when takeover attempts fail? Drawingfrom agency theory, we argue that target firms managed by independent directory boards arelikely to ignore the takeover attempt and not refocus their firms’ strategy. Conversely, targetfirms managed by nonindependent boards are more likely to view the failed takeover attemptas a ‘wake-up call’ and will refocus their firms’ strategy so as to preserve the firm’s survival.These arguments are tested using a sample of 76 firms that were targets of failed hostile takeoverattempts. Logistic regression analyses confirm the predictions. This study suggests that in theaftermath of a failed takeover attempt board of director characteristics can help predict changesin corporate strategies. Copyright 2002 John Wiley & Sons, Ltd.

Hostile takeovers were popular actions in the1980s, presumably because firms had becomeover-diversified from conglomerate acquisitions inthe 1960s and 1970s, and buying these firms andthen breaking them up could create value. Con-sequently, a hostile takeover attempt may be seenas a ‘wake-up call’ that the target firm had beenmanaged inefficiently and that changes in manage-ment and strategies could produce value (Denis,Denis, and Sarin, 1997). This signal raises a ques-tion: What happens to the firms that effectivelyrepel the takeover offer? Do these firms restructureso as to avoid future takeover offers? Or do they

Key words: governance; agency; refocusing; restructur-ing; takeovers*Correspondence to: Sayan Chatterjee, Weatherhead School ofManagement, Case Western Reserve University, 10900 EuclidAvenue, Cleveland, OH 44106-7235, U.S.A.

continue as before, with no significant changes tothe target’s strategy?

This study addresses these questions. Buildingfrom the agency theory arguments that takeoversare a disciplinary mechanism, we argue that targetfirms that have independent and vigilant direc-tory board members are less likely to refocus theircompanies after the failed attempt. Such directorswould have confidence in the strategies of theirfirms and believe the takeover offer was a mistake.In contrast, nonindependent and nonvigilant direc-tors are more likely to view the takeover attempt asa signal that their firms are inefficient and vulner-able for another offer. We expect these firms willtake actions to refocus their strategies to avoid fur-ther takeover attempts. These arguments are testedby a sample of 76 target firms that repelled hos-tile takeover offers. Our findings support these

Copyright 2002 John Wiley & Sons, Ltd. Received 10 June 1996Final revision received 1 July 2002

88 S. Chatterjee, J. S. Harrison and D. D. Bergh

arguments and provide an indication as to how andwhy firms react differently to a strong signal thatthey may have been managed ineffectively.

THEORY

We will begin by relating the traditional agencytheory arguments to governance characteristics anddiversification strategy. We will then discuss theroles of directors and how those roles may beinfluenced by board independence. Finally, we willdevelop specific hypotheses regarding the influ-ence of board characteristics on the decision torefocus after a failed takeover attempt.

Agency, governance, and diversificationstrategy

Managers can be viewed as agents for the share-holders of public corporations. According to Jensenand Meckling (1976: 308), an agency relation-ship is a ‘contract under which one or more per-sons (the principal(s)) engage another person (theagent) to perform some service on their behalfwhich involves delegating some decision-makingauthority to the agent.’ They continue, ‘If bothparties to the relationship are utility maximizersthere is good reason to believe that the agentwill not always act in the best interests of theprincipal.’ Agency problems exist any time man-agers serve their own interests at the expense oftheir shareholders (Williamson, 1984; Fama andJensen, 1983). Evidence of agency problems issometimes found in excessive compensation, exec-utive perquisites, or in aggressive but unprofitablegrowth strategies, sometimes called ‘empire build-ing.’ For example, a manager might be predisposedto supporting a diversifying acquisition in order toincrease managerial power or expected compen-sation, or reduce employment risk, regardless ofwhether the acquisition is really in the best inter-ests of shareholders (Hoskisson and Turk, 1990;Jensen, 1986; Amihud and Lev, 1981). Relatedto this argument, Seward and Walsh (1995) dis-covered that CEO stock and options were strongpredictors of subsequent acquisition activity.

Agency problems create the need for effectivecorporate governance (Baysinger and Hoskisson,1990; Pfeffer and Salancik, 1978; Walsh andSeward, 1990). Internal governance occurs as aboard of directors actively seeks to protect the

interests of shareholders. An active board moni-tors top managers and influences their decisionsthrough counseling activities as well as determin-ing executive compensation (Johnson, Daily, andEllstrand, 1996). In extreme situations, a board canterminate the contract of a top manager and select anew one. However, not all boards are independentenough from the CEO to effectively govern topmanagement activities, resulting in managemententrenchment (Fredrickson, Hambrick, and Baum-rin, 1988; Spencer, 1983; Walsh and Seward, 1990;Westphal, 1999). For example, CEOs may use theirde facto power to pack their boards with friends(Bainbridge, 1993). This can occur even thoughshareholders elect directors, because they cannotnominate them and often they do not becomeinvolved in elections, instead giving their votingrights to management through the proxy system(Goforth, 1994).

If internal governance is inadequate, then exter-nal governance mechanisms may eventually play asignificant role in realigning the interests of man-agers and shareholders, when sufficient equity isowned by outside (nonmanagement) shareholders(Hoskisson and Turk, 1990). External governanceoccurs partially as a result of the market for corpo-rate control (Denis et al., 1997). An active marketmeans that if publicly held assets are being man-aged in a suboptimal fashion, then the market willwork to correct this problem by transferring controlinto the hands of more effective managers. Exter-nal governance occurs as large or well-organizedexternal shareholders influence directors to cen-sure or replace incompetent managers or as theyorganize to elect a new board of directors. Froma broad economic or societal perspective, corpo-rate takeovers may also be viewed as an externalgovernance mechanism, since they result in trans-fer of ownership (and thus management control)to a market participant that believes the acquiredassets will become more valuable under differentmanagement (Denis et al., 1997).

Internal and external governance issues may bediscussed in the context of a firm’s diversificationstrategy, since diversification seems to differ inattractiveness between managers and shareholders.The ‘conglomerate’ merger wave of the 1960s andearly 1970s resulted in higher levels of diversifica-tion for large U.S. firms (Servaes, 1996; Shleiferand Vishny, 1991). Unfortunately, increasing lev-els of diversification typically did not result in

Copyright 2002 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 87–96 (2003)

Research Notes and Commentaries 89

higher levels of financial performance. For exam-ple, Servaes (1996) discovered a large diversifi-cation discount during this time period (see alsoRavenscraft and Scherer, 1987). By the 1980s, thetrend towards diversification was replaced by anincreasing emphasis on corporate focus, or ‘down-scoping’ (Hoskisson and Hitt, 1994). Davis et al.(1994) used time series data to demonstrate thatduring the 1980s the largest industrial firms in theUnited States became significantly less diversified(see also Berger and Ofek, 1995; Comment andJarrell, 1995; John and Ofek, 1995). For example,Beatrice Foods, the most active acquirer in Amer-ica from 1955 to 1979, became the most activedivestor from 1979 to 1987 (Baker, 1992). Allof the companies Beatrice bought in the earliertime period were sold during the 1980s. Empiri-cal evidence supports the position that increasesin corporate focus result in higher financial perfor-mance (Bhagat et al., 1990; Kaplan and Weisbach,1992; Lang and Stulz, 1994; Berger and Ofek,1995; Comment and Jarrell, 1995).

Since reductions in diversification were likelyto lead to increased shareholder wealth during the1980s, and since refocusing was so popular, onemight ask why some firms did not follow thattrend. Two reasons seem plausible. First, not alldiversification strategies were unsuccessful. Forinstance, General Electric has been highly success-ful with its diversification strategy for many years.However, it was also possible that for some orga-nizations an agency problem existed, reflected bycontinued pursuit of a level of diversification thatwas more attractive to managers than it was toshareholders. Diversification can provide benefitsto managers that are not enjoyed by shareholders,such as the potential for increased compensationrelated to the increased size of the organization anda reduction in employment risk due to creating aportfolio of businesses in which poor performancein one area can be offset by high performance inanother (Amihud and Lev, 1981; Hoskisson andTurk, 1990; Jensen, 1986).

Owners, managers and the board of directors

The separation of ownership from control in mod-ern corporations has led to important issues sur-rounding the roles and behaviors of owners, man-agers, and boards of directors (Berle and Means,1932; Johnson et al., 1996). Individual sharehold-ers typically have little influence over the decisions

of managers unless they possess a large propor-tion of stock in a company. Their primary moti-vation for holding stock is to increase personalwealth. Managers have a fiduciary responsibility toact in the best interests of shareholders and sinceshareholders are primarily interested in wealth cre-ation, this is one of their major responsibilities.Close scrutiny of managers would be very costlyfor individual shareholders relative to the size oftheir investments. However, shareholders elect aboard of directors, charged with the responsibilityto ensure that shareholder interests are protected(Jensen and Meckling, 1976). Although directorsalso play important advisory and boundary span-ning roles, their primary responsibility is to mon-itor top managers, at least from a legal perspec-tive (Miller, 1993; Chatterjee and Harrison, 2001;Johnson et al., 1996).

Directors are expected to act in good faithand make decisions that are independent of per-sonal interests or relationships (Block, Barton,and Radin, 1989; Miller, 1993). Nevertheless,conflicts of interest can emerge when directorsshare business or social ties with the executivesthey are monitoring (Bainbridge, 1993; Johnson,Hoskisson, and Hitt, 1993). In the extreme case,directors who are also organizational managersmay feel compelled not to contradict or censurethe CEO (Baysinger and Hoskisson, 1990; Weis-bach, 1988). These situations can result in agencyproblems and management entrenchment, as dis-cussed in the introduction. However, boards thatconsist largely of independent (nonmanagement)directors should be better monitors of executiveactions (Bainbridge, 1993; Baysinger and Butler,1985).

In theory, board independence should lead tohigher firm performance. However, Dalton et al.(1998), in a meta-analysis, concluded that there islittle evidence of a systematic relationship betweengovernance structure and performance. Neverthe-less, it is premature to assume from this evi-dence that governance does not matter. Indeed,evidence is emerging that the governance charac-teristics of boards of directors are more importantin times of organizational stress than during timesof good fortune (Chatterjee and Harrison, 2001;Daily, 1996; Daily and Dalton, 1994, 1995; Lorschand MacIver, 1989). Such findings are perfectlycompatible with existing theory regarding agencyand director responsibilities. If times are good,there is little motivation for directors to interfere



with management. In fact, such interference couldbe contrary to shareholder interests and wealthcreation (Davis et al., 1997). However, when orga-nizational performance is substandard or when theorganization is in a period of stress, an independentboard may be in a better position than a dependentboard to exert the influence necessary for changeor improvement.

Firms that refocus after a failed takeoverattempt

Governance, if it matters, should be involved inmonitoring the strategic direction of the firm. Inthis study, we have identified a precise point intime when there is a prima facie stimulus forreconsidering the strategies of the firm. In partic-ular, we study a group of firms that have rejecteda takeover offer, since the board can hardly treatsuch an offer as a normal event. For example,Safieddine and Titman (1999) discovered that tar-gets that terminate takeover offers subsequentlyincrease their leverage. Our hypotheses predictwhether a firm will refocus given its antecedentgovernance characteristics.

Even after a major event such as a takeoverattempt, boards that have taken their monitoringduties seriously may still assume that their organi-zation’s strategies are appropriate (Hershleifer andThakor, 1994). Although there was a very strongrefocusing trend during the 1980s and early 1990s,the existence of a vigilant board should mean thatthe firm’s diversification strategy was under con-stant scrutiny and either that it was appropriate forthe firm or, at least, that board members believedthat it was appropriate. In this situation, we expecta lower incidence of refocusing than in firms withboards that are less likely to be vigilant.

In firms in which management has too muchdiscretion (i.e., not independent board) there isa higher probability of agency costs in the formof an entrenched management. Such agency costsare likely to manifest as a level of diversificationthat is suboptimal from the shareholder’s point ofview (Hoskisson and Hitt, 1994: 44). Under thesecircumstances, most firms would benefit the mostfrom refocusing or reducing their levels of diversi-fication (Hoskisson and Hitt, 1994). The takeoveroffer serves to reduce agency costs by exposingsuboptimal diversification, which motivates man-agement to reverse the process to prevent furthertakeover offers and/or a loss of their jobs.

Independent boards are expected to be more vig-ilant in monitoring firm strategies. Board indepen-dence is most often associated with a high level ofoutside director influence relative to inside directorinfluence (Bainbridge, 1993; Baysinger and Butler,1985; Judge and Zeithaml, 1992). Possible indica-tors of this independence include a high proportionof external board members relative to insiders, ahigh percentage of shares held by external boardmembers, and a small percentage of shares held byinside shareholders. Lack of CEO duality (CEOchairs the board) is also associated with a moreindependent board (Coles and Hesterly, 2000; Sun-daramurthy, Mahoney, and Mahoney, 1997).

Hypothesis 1: In the aftermath of a rejectedtakeover offer, target firms that have boards withindependent governance characteristics are lesslikely to refocus than firms without independentboard characteristics. Therefore, board indepen-dence will be related negatively to the incidenceof refocusing.

We do not study firms that immediately accept theinitial offer because acceptance of the first offermay simply imply the culmination of an earlierstrategic decision to reallocate the resources ofthe firm in this way. Also, selecting firms thatwere immediately taken over would defeat ourpurpose of trying to identify the precise pointwhere the option to realign a firm’s strategy shouldbe strongly considered by the firms in our study.Instead, we are studying firms that reject the initialoffer and then we are following them to determinetheir subsequent actions. If these firms ultimatelydecide to refocus, then we have a strong basis foridentifying the precise point in time when they arejolted into thinking about changing their existingstrategies in order to create shareholder value. Inparticular, we are interested in the role of the boardfor these two groups.

METHOD

Sample

Our starting sample was the 251 largest failedtakeover bids reported in Mergers and Acquisitionsbetween 1981 and 1991. The 1980s time frame wasused because of the strong trend towards refocus-ing during that period and the abundance of evi-dence that refocusing would enhance shareholder



wealth. Of these firms, 52 were taken over by theinitial or a subsequent bidder, while the remain-ing firms remained independent for the period ofstudy. Complete data were available for 119 firmsin the (1995) CRSP tapes. Of these 119 firms, gov-ernance and segment sales data could be obtainedfor 76 firms. These 76 firms constituted our finalsample. Data were collected from proxies, 10Qand 8Q statements, the Trinet Data Base, Com-pact Disclosure, the CRSP and Compustat tapes,Lexis/Nexis, Dow Jones News Retrieval, Secu-rity Data Corporation database, and the InvestorResponsibility Research Center. Variables weremeasured at the time of first bid, except as notedbelow.

Measures

The refocusing variable was constructed as fol-lows. We used a keyword search for ‘restructur-ing’ in Lexis/Nexis and Dow Jones New Retrievalcoupled with the firm name of the target for the4 years following the initial takeover attempt. Forexample, for Pabst Brewing we did a search for1982–86. If a clear story about refocusing didnot emerge, then we searched the remaining firmswith no keywords for the 4 years following thetakeover attempt. We read all stories where theheadline suggested the possible description of refo-cusing activities such as spin-offs or sales of plantsor divisions. A dummy variable was coded as 1if we found evidence of refocusing and 0 if wedid not.

As explained earlier, the effectiveness withwhich boards are thought to function is a result ofcharacteristics associated with board independenceand size. Board Demography was measured by theproportion of board members who are outsiderswithout current or past employment contractswith the firm. Insider Holding was measured asthe number of shares held by inside directors(including the CEO) divided by the total numberof outstanding shares. Outsider Holding wasmeasured as the number of shares held byoutside directors divided by the total number ofoutstanding shares (Monks and Minow, 1995;Johnson et al., 1993; Mallette and Fowler, 1992).CEO Duality was coded 1 if the CEO alsochaired the board (0 otherwise). As explainedin the theory section, independent governancecharacteristics were associated with lower valuesof Insider Holdings, higher values of Board

Demography and Outsider Holding, and theabsence of CEO Duality.

Several control variables were added. LargeBlockholders are individuals or institutions thathold 5 percent or more of the outstanding equity ofthe firm as measured by the ratio of the shares heldby outside (nondirector) blockholders, reported inthe proxy statements, divided by the total numberof shares outstanding. Higher levels of blockhold-ing and factors associated with effective gover-nance are expected to be associated with refo-cusing and subsequent takeover (Johnson et al.,1993). Management Turnover controls for the pos-sibility that the takeover was directed at removingineffective managers and improving performance.This variable was coded 1 if the CEO left in the3 years following rejection of the initial takeoveroffer and zero otherwise. We also controlled forBusiness Turbulence, which has been shown tobe correlated with refocusing (Bergh and Law-less, 1998), using a weighted average variance ofsales of the individual business segments measuredfrom 3 years prior to the takeover announcementdate.

We controlled for Size by taking the log of totalsales at the announcement of the initial bid. Inaddition, we controlled for Leverage measured bydebt over market value, also at the time of thefirst bid. Leverage is associated with actions takento increase or decrease a firm’s diversification(Hoskisson and Hitt, 1994). We also controlled forthe presence of Poison Pills with a 1 if we foundevidence of antitakeover provisions and a 0 if wedid not. Poison pills are prima facie evidence ofmanagement entrenchment (Davis, 1991; Malleteand Fowler, 1992; Sundaramurthy, Rechner, andWang, 1996).

Concerns have been raised regarding large andinefficient boards by both practitioners (Monks andMinow, 1995) and academics (Jensen, 1993). Moredirectly, Judge and Zeithaml (1992) found a neg-ative relationship between board size and boardinvolvement in strategic decisions. Consequently,we used the number of directors on the board tocontrol for Board Size. We also controlled for thepossibility of multiple bids during the year of theinitial bid. This variable was scored as a 1 if multi-ple bids occurred and a 0 otherwise. Performancewas also used as a control variable, since firmswith high performance are less likely to need torestructure (Hoskisson and Turk, 1990). We useabnormal buy and hold return (BHAR) for each



firm in our sample to compute stock market perfor-mance. This measure was developed by Barber andLyon (1997) and currently is the preferred methodfor computing long-run abnormal return in financestudies. Basically, this measure captures the stockmarket performance over a period (using com-pounded return) adjusted by the average increasefor firms of similar size over a given period. If afirm performs better than its peer group then thismeasure will be positive.

Finally, we controlled for diversification usingthe entropy measure (Davis et al., 1994; Palepu,1985), since firms that have high levels of diver-sification at the point of the initial offer may bemore likely to engage in refocusing activities. Inour sample, the firms that refocused had an aver-age level of entropy of 1.51, with those that did notat 1.37. Both of these figures are high comparedto the values reported by Davis et al. (1994) forFortune 500 firms during the same time period.They found average entropy of 1.00 in 1980, 0.90in 1985 and 0.67 in 1990. Hoskisson and John-son (1992) reported levels at 0.97. Also, Hitt et al.(1991) looked at a group of firms that they claimedhad bad strategies with regard to long-term value.Their sample firms had average entropy of 1.62and were likely candidates for restructuring in thefuture. These comparisons provide support for theidea that the targeted firms in our sample may havebeen more in need of refocusing than other firmsduring the period.

RESULTS

We used logistic regression (SAS Proc Logist) totest our two hypotheses. Descriptive statistics andcorrelations are reported in Table 1. Results fromthe tests of hypotheses are found in Table 2. TheLogit model is highly significant (p < 0.0001).Support is found for Hypothesis 1 for two of thefour variables (p < 0.05). Specifically, refocus-ing was more likely in firms with relatively highlevels of inside director stock ownership (InsiderHolding) and relatively low levels of outside direc-tor stock ownership (Outsider Holding). These arecharacteristics associated with a lack of board inde-pendence.

Among the control variables, a strong relation-ship exists (p < 0.01) between refocusing andbusiness turbulence. Leverage (p < 0.05) is alsosignificant.

DISCUSSION AND CONCLUSIONS

In spite of the large volume of research ongovernance, much of it is inconclusive with regardto the influence of governance characteristicson firm behavior and performance (Daltonet al., 1998; Chatterjee and Harrison, 2001).Nevertheless, a research stream is emerging thatsupports the idea that governance characteristicsare more likely to be relevant during timesof organizational stress (Daily, 1996; Dailyand Dalton, 1994, 1995; Lorsch and MacIver,1989). Our findings contribute to this streamby demonstrating that governance can make adifference with regard to how firms respond to afailed takeover attempt. Specifically, we found thatfirms with two characteristics generally associatedwith board independence are less likely to pursuerefocusing strategies.

We explain this phenomenon in terms of boardvigilance. An independent board is more likely tobe vigilant on an ongoing basis with regard toevaluating firm strategies. Consequently, a shocksuch as a takeover attempt is less likely to causethe board to believe that the firm’s diversificationstrategy is inappropriate. In fact, to the extent thatgovernance works, an independent board shouldactually help a firm select an appropriate diver-sification strategy. In other words, not only willdirectors believe that their firm’s strategy is appro-priate, but they are likely to be correct. We are notreally saying that the board is correct ‘ex post’ butthat they believe they are correct ex ante and hencethey refuse to change the firm’s strategy.

This study also demonstrates the importance of atakeover attempt as a signaling mechanism. Previ-ously, Safieddine and Titman (1999) found signif-icant increases in leverage in targets that had ter-minated takeovers, although they did not accountfor the impact of governance characteristics onthe actions taken by the firms. They attributed thechanges they observed to efforts on the part ofexecutives to make the same types of changes totheir firms that successful raiders would make. Atakeover attempt can act as a ‘wake-up call’ tocause them to rethink the strategies of the firm. Ourstudy focuses on diversification rather than financ-ing. We have argued that during the time frameof our study firms that had not been adequatelygoverned would probably benefit the most fromrefocusing (Hoskisson and Hitt, 1994). Therefore,a takeover attempt can serve to reduce agency



Tabl

e1.

Des

crip

tive

stat

istic

san

dco

rrel

atio

nsa

Var

iabl

eM

ean

S.D

.1

23

45

67

89

1011

1213

14

1.R

efoc

us0.

4342

0.49

902.

Boa

rdD

emog

raph

y0.

5275

0.33

190.

039

3.O

utsi

der

Hol

ding

0.00

860.

0188

−0.1

920.

002

4.In

side

rH

oldi

ng0.

0613

0.11

180.

049

0.12

5−0

.066

5.C

EO

Dua

lity

0.59

210.

4947

−0.0

830.

378

−0.2

76−0

.257

6.B

lock

hold

ing

0.11

870.

1919

0.03

10.

162

−0.1

220.

017

0.31

87.

Tur

nove

r0.

0658

0.24

96−0

.018

0.23

70.

315

0.10

9−0

.104

0.00

98.

Tur

bule

nce

0.34

750.

2442

0.58

10.

028

−0.2

170.

014

−0.0

470.

161

−0.0

819.

Size

5.02

601.

6270

0.28

8−0

.109

−0.3

130.

351

−0.0

190.

037

−0.0

460.

252

10.

Lev

erag

e0.

2199

0.04

86−0

.079

0.10

3−0

.092

0.86

9−0

.220

−0.0

380.

097

0.03

10.

440

11.

Pois

onPi

ll0.

6316

0.48

560.

009

−0.0

010.

139

0.05

5−0

.023

0.04

30.

203

−0.0

60−0

.087

0.04

012

.B

oard

Size

9.96

054.

4013

−0.1

740.

421

−0.2

71−0

.120

0.64

80.

209

0.01

5−0

.116

0.00

50.

057

−0.0

5713

.M

ulti

ple

Bid

s0.

2105

0.41

04−0

.062

0.06

9−0

.105

0.18

80.

100

0.14

9−0

.007

0.10

50.

053

0.21

00.

127

0.20

414

.Pe

rfor

man

ce0.

0411

0.43

40−0

.058

−0.2

91−0

.370

−0.0

140.

004

0.12

1−0

.378

0.02

40.

241

0.15

20.

054

0.01

0−0

.042

15.

Div

ersi

ficat

ion

1.37

780.

4150

0.28

3−0

.123

−0.2

510.

192

−0.0

710.

024

−0.0

780.

333

0.78

30.

356

−0.1

320.

008

0.02

30.

209

an

=76

.C

orre

latio

nco

effic

ient

s>

0.22

are

sign

ifica

ntat

p<

0.05

;co

effic

ient

s>

0.29

are

sign

ifica

ntat

p<

0.01

.



Table 2. Results of logistic regression analysis predicting refocusinga

Variable Estimate Chi-sq. Pr > Chi-sq.

Intercept 30.065 4.371 0.0364

Primary variablesBoard Demography 1.280 0.620 0.4310Outsider Holding −250.900 3.899 0.0483Insider Holding 48.9100 4.542 0.0331CEO Duality −3.164 2.437 0.1185

Control variablesBlockholding −2.514 0.826 0.3635Turnover 1.426 0.253 0.6152Turbulence 12.179 8.069 0.0045Size 0.531 1.417 0.2339Leverage −173.600 5.190 0.0227Poison Pill 0.736 0.640 0.4236Board Size −0.055 0.093 0.7611Multiple Bids −1.953 1.855 0.1732Performance −0.381 0.075 0.7842Diversification 0.927 0.293 0.5882

a n = 76, d.f. 13, likelihood ratio chi-sq. 59.633, p < 0.0001.

costs by exposing suboptimal diversification (orsuboptimal financing), which provides motivationto management and the board to adjust the strategyin order to prevent further takeover attempts andreduce employment risk. Boards that can act deci-sively and are not as emotionally attached to thestrategy of the firm are more likely to be objectiveabout the signal from the market and respond toit (Byrd and Hickman, 1992). However, even thevigilant boards may have paid some concessionto the takeover offer by increasing their leverage.This act may be a signal to the capital market thatthere is no reason to suspect that free cash flow isguiding the firm to take actions that are contraryto shareholder interests.

We found support for these ideas in two of thegovernance variables associated with board inde-pendence. As the percentage of shares held byinsiders increased and outsiders decreased, firmswere more likely to refocus. However, we weresurprised to discover that CEO duality was notonly insignificant, but was heading in the oppo-site direction (p < 0.12). We expected to find thatsince CEO duality is associated with entrench-ment, the external market signal associated with atakeover attempt would be enough to move direc-tors to action, even if they have to contradict theCEO/chair. Apparently, such is not the case. Itmay be that the power of a CEO/chair is so greatthat even a rather large shock is not enough to

motivate a change in strategy. The lack of signif-icance in the board demography variable (propor-tion of outside directors) may be an indication thatit is stock ownership by outside directors and notsimply their board seats that results in influence onexecutive decisions.

Although our empirical results provide sup-port for the hypothesis that board characteris-tics can influence the response of a firm to atakeover attempt, we must also acknowledge thatmany factors influence takeovers. For example,the acquiring firm may not see the strategy ofthe potential target as weak, but may be seek-ing unused cash flow, new markets, synergy, ormany other benefits. Also, diversification may notbe as closely associated with empire building andentrenchment as our theory suggests. In additionto these theoretical limitations, our study alsosuffers from several empirical limitations relatedto narrowness of focus. In order to isolate theeffect we were seeking, we ignored many otherfactors that would provide for a more completepicture of what was driving decision-making inthe organizations in our sample. Future researchcan address these limitations by including vari-ables such as preattempt turnover and a full rangeof owner, director, and manager variables bothpre- and post-takeover attempt. Also, we werelimited because we did not include, for com-parison purposes, firms that were acquired or a



group of peer firms that were not sought fortakeover.

Nevertheless, this study provides support forthe idea that governance characteristics can influ-ence the behavior of organizations in a time ofstress. It also emphasizes the importance of thetakeover attempt as a signal that can help to reduceagency costs. This evidence is important becausetakeovers are not universally accepted as a pos-itive event and, in fact, some societies see themas a largely destructive phenomenon. Finally, ourfindings provide support for the notion that agencyproblems may be at least partially responsible forfirms maintaining value-reducing strategies.

ACKNOWLEDGEMENTS

We thank Sam Thomas for the CRSP access pro-grams. We also thank Bert Cannella and TexasA&M for the governance data, Doug Blocher forthe diversification measures, and Hitesh Bagadiyaand Pat Coburn for research and programmingassistance. This study has benefited from com-ments from Ajay Singh, Paul Salipante, JohnAram, the anonymous reviewers, and especiallyfrom the work of Rita Kosnik during the earlystages of the project.

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failed takeover attempts, corporate governance and refocusing

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