Abstract

In this study, we examine how corporate internal control mechanisms, including the percentage ownership by executive officers and directors and the proportion of outside directors on the board of directors, affect the market's perception of corporate acquisition decisions. The evidence suggests that in the period around acquisition announcements, the use of insider ownership and outside directors disciplines managers to make decisions that the market perceives as better reflecting the interests of shareholders. The combination of stock ownership and outside director monitoring is perceived as providing a better control system for top management than the sole use of either of these two external governance mechanisms. Compared to firms with low insider ownership interest, acquirers with high ratios of officer and director ownership pay less for targets that have higher growth opportunities. With regard to the longer post-acquisition period, ex post market performance is consistent with outside directors (but not insider ownership) acting in shareholders interests.