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Officers’ Fiduciary Duties and Acquisition Outcomes

A Delaware case law recognized officers’ distinct fiduciary duties (OFDs) for the first time in 2009. I use this legal event as a natural experiment to examine the effect of OFDs on corporate acquisition decisions. I find that firms whose officers were protected from market discipline prior to 2009 experienced increased announcement-period abnormal stock returns after the event, mainly because post-event acquisitions by these firms created more synergies and reduced officers’ control. These firms also increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies after the event. Furthermore, I find that the effect of OFDs is more pronounced at firms where officers are not directors (thus, do not have access to liability insurance), have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall results suggest that OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.