Coordinated monitoring and mergers and acquisitions

• Published date: 01 June 2024
• Author: Ettore Croci,Mieszko Mazur,Galla Salganik‐Shoshan
• Date: 01 June 2024
• DOI: http://doi.org/10.1111/eufm.12449

DOI: 10.1111/eufm.12449

ORIGINAL ARTICLE

Coordinated monitoring and mergers and

acquisitions

Ettore Croci

1

|Mieszko Mazur

2

|Galla Salganik‐Shoshan

3

1

Department of Economics and Business

Management, School of Banking,

Financial and Insurance Sciences,

Università Cattolica del Sacro Cuore,

Milan, Italy

2

ESSCA School of Management,

Boulogne‐Billancourt, France

3

Department of Business Adminitration,

Guilford Glazer Faculty of Business and

Management, Ben‐Gurion University of

the Negev, Beer Sheva, Israel

Correspondence

Mieszko Mazur, ESSCA School of

Management, 55 Quai Alphonse le Gallo,

Boulogne‐Billancourt 92513, France.

Email: mieszko.mazur@essca.fr

Abstract

This paper shows that coordinated monitoring by

institutional investors affects how firms behave in the

M&A market. We employ the spatial dimension of

geographic links between major institutions as a proxy

for interaction and information exchange—a process

that determines the effectiveness of investor monitor-

ing over firm management. Using data over the last 30

years, we show that the returns to acquiring share-

holders are significantly higher, and M&A activity is

significantly more intense when institutions coordinate

better their monitoring efforts. Our results are robust to

series of tests to gauge their sensitivity to different

model specifications and estimation procedures.

KEYWORDS

institutional investor, M&A, monitoring

JEL CLASSIFICATION

G34 Mergers •Acquisitions •Restructuring •Corporate

Governance, G3 Corporate Finance and Governance,

G. Financial Economics

The authors thank Nihat Aktas, Thomas David, Olubunmi Faleye, Laurent Fresard, Edith

Ginglinger, Andrey Golubov, Stefan Jaspersen, Michal Kowalik, Gianluca Mattarocci, Mario

Milone, Dimitris Petmezas, Matthew Pritsker, Monika Tarsalewska, and seminar participants

at the Université Paris‐Dauphine, D'Amore‐McKim School of Business, Federal Reserve Bank

Eur Financ Manag. 2024;30:1422–1459.1422

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This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial‐NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non‐commercial and no modifications or

adaptations are made.

© 2023 The Authors. European Financial Management published by John Wiley & Sons Ltd.

of Boston, Università Cattolica del Sacro Cuore, Cyprus University of Technology, University of

Bologna, the Paris December 2017 Finance Meeting, 2017 Financial Management Association

European Meeting, 2017 European Financial Management Association Annual Meeting, XI

Luso‐Brazilian Finance Meeting, 2017 Frontiers of Business Research in China International

Symposium, and the Labex Refi Second French Workshop on Corporate Governance for

helpful comments. The authors are also sincerely grateful to John Doukas, the Editor, and two

anonymous referees for the invaluable feedback and constructive suggestions.

1|INTRODUCTION

One of the critical functions of institutional investors is to monitor management (e.g., Dyck

et al., 2019;Gillan&Starks,2000;Kangetal.,2018). Due to inherent costs, monitoring is

typically performed only by large shareholders with sizable stakes in the company

(Edmans, 2014;Shleifer&Vishny,1986). However, coordination among investors can

enhance the likelihood of interventions in corporate affairs: if an investor does not have

sufficient incentives to monitor by itself, it may team up with other large investors and exert

joint pressure on the firm's management (Edmans, 2014;Noe,2002;Shleifer&

Vishny, 1986).

Inspired by these theories, we attempt to answer the question of whether multiple large

investors team up intending to influence firms' decisions in the process, to which we refer

throughout the paper as coordinated monitoring. Despite the theoretical appeal, these theories

have limited empirical tests (e.g., Dimson et al., 2021; Doidge et al., 2019). We address this

question in the context of mergers and acquisitions (M&A)—complex and nonroutine

corporate transactions that should require careful monitoring. More specifically, we investigate

the impact of coordinated monitoring on the M&A outcomes concerning the intensity of M&A

and their implications on shareholder wealth.

There are several reasons why coordinated monitoring should matter for M&A. Edmans

(2014) argues that teams of blockholders may arise to encourage management to make valuable

long‐term strategic decisions. Thus, institutions that engage in coordinated monitoring might

suggest a strategic direction for the firm in terms of acquisitions, sharing their specialised

expertise and knowledge with the top management (Bao & Edmans, 2011; Field &

Mkrtchyan, 2017).

1

Recent empirical studies (e.g., Dimson et al., 2021; Doidge et al., 2019)

indeed provide anecdotal examples of teaming up by institutional investors and intervening

directly in portfolio firms. Ferreira et al. (2010) also document that institutional investors help

connect bidders and targets in the international market for corporate control. This facilitator

role can be enhanced when institutional investors coordinate their activities. Finally, Cronqvist

and Fahlenbrach (2009) also show that large investors enhance M&A activity regarding the

number of undertaken acquisitions. Thus, if stronger coordinated monitoring facilitates the

discovery of good investment opportunities, we should observe a greater volume of M&A

activity. However, it is also well‐known that firms may engage in value‐destroying transactions

(Loughran & Vijh, 1997; Moeller et al., 2005; Roll, 1986), thus diminishing the value of equity

stakes held by institutional investors in acquiring firms. It pertains especially to large

1

A noted real‐life example is Procter & Gamble, a company that traditionally used to eschew acquisition but under

pressure from institutional investors initiated new strategic priorities and in 2018 began acquiring new brands catering

to millennials.

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shareholders who may want to closely monitor the M&A process, intervening to block negative

NPV deals. In this case, a stronger coordinated monitor should be associated with fewer deals.

Existing literature offers some support for this conjecture, indicating that the concentration

of institutional ownership affects the quality of M&A (Chen et al., 2007; Cronqvist &

Fahlenbrach, 2009). It is worth emphasising that M&A are heterogenous transactions, and

while the average return to acquirers hovers around zero, returns from closely monitored M&A

tend to be significantly higher (Chen et al., 2007). This leads us to believe that coordinated

monitoring should be associated with significantly greater returns to shareholders of the

acquiring firm.

We attempt to capture the coordinated monitoring effect using measures of geographic

distance between major institutional investors. Extensive academic literature shows that

geographic proximity fosters interaction sharing of information and ideas. For example, Hong

et al. (2005) document that professional investors exchange information through face‐to‐face

communication during formal and informal meetings. Their analysis indicates that this

communication is more effective if the geographic distance between investors narrows and that

investors make similar investment decisions when located near one another. Similarly, Coval

and Moskowitz (1999,2001) show that institutional investors obtain access to unique

information attainable to them through geographic proximity and direct interaction with firm

managers. Building on this literature, we construct measures of coordinated monitoring by

major institutional investors using geographic distances between their headquarters. We posit

that coordinated monitoring will be more effective if investors are located close by, as

geographic proximity entails more significant social interaction and improves information

flow.

2

We then use these measures to predict whether firms are more or less likely to engage in

M&A activity and whether the quality of the M&A differs depending on how well multiple

investors coordinate their monitoring efforts.

We find evidence that coordinated monitoring affects M&A outcomes. For a sample of US

public firms from 1990 to 2019, we document that the firm's acquisitiveness increases

significantly with geographic proximity between major investors. This effect remains

substantial after controlling for other measures of institutional presence, including institutional

ownership, number of blockholders, and blockholder ownership, and after adding all standard

controls. When we put these results in the economic context, we find that a one‐standard‐

deviation increase in physical proximity among investors corresponds to a roughly 5% increase

in the probability of undertaking an acquisition and a 35% increase in the annual aggregate deal

value (both relative to the mean), which suggests a sizable impact of coordinated monitoring on

the intensity of M&A. A word of caution is needed here: due to data limitations, our evidence is

indirect and is based on the geographic proxy for the activity of coordinated monitoring.

In the second part of our analysis, we explore the cross‐sectional variation in cumulative

abnormal return (CAR) for acquirers around the M&A announcements. We find that acquirer

CARs vary with the physical distance between major investors and are significantly higher

when investors are headquartered geographically closer to one another. This variation implies

that if coordinated monitoring is more effective, acquirers make on average better acquisition

decisions and generate more value for their shareholders. The economic implication of this

result is that a one‐standard‐deviation increase in investor proximity improves abnormal

2

Interestingly, recent global policy survey by Institutional Shareholder Services (ISS) indicates that investors prefer

physical meetings with the management over virtual and distant communication (https://www.issgovernance.com/iss-

announces-results-2018-benchmark-voting-policy-survey/).

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