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Contents lists available at ScienceDirect

Journal of High Technology Management Research

journal homepage: www.elsevier.com/locate/hitech

High-tech acquirers and the moderating role of corporate

7
governance
Mohamed Firas Thrayaa, , Jessica Lichya, Amir Louizib, Marouane Rzemc
⁎

a
IDRAC Business School, Lyon, France
b
IDRAC Business School, Paris, France
c
Université Jean Moulin, Lyon, France

A R TIC L E INFO A B S TR A C T

Keywords: In this article, we examine the role of corporate governance for improving the perception of
Governance Merger & Acquisition (M&A) transactions in the high-tech sector. Based on a sample of trans-
Mergers & Acquisitions (M&A) actions initiated by listed French firms, we analyse the impact of corporate governance on the
High technology (high-tech) short-term performance of acquisitions. We demonstrate that high-tech firms which are con-
Performance
sidered to have good governance achieve significantly higher returns. These results are further
confirmed when we look exclusively at diversification transactions. In addition, these firms
particularly perform better than firms with good governance in other sectors of activity. On the
other hand, high-tech firms which are considered to have weak governance perform less well.
Lastly, it appears that the acquisition of small innovative companies will generate more value
creation.

Classification JEL

G14
G34
O32

1. Introduction

The Organisation for Economic Co-operation and Development (OECD) and the European Union have long encouraged their
members to develop entrepreneurship and innovation in the high-tech sector. The creation of high-tech companies has become a
priority for the French public authorities. These companies have become emblems of innovation, driving the renewal of the economic
fabric and, in turn, the growth and jobs of tomorrow (Albert (2015). The high-tech sector is characterised by very high growth
compared with other industries, hence, M&A transactions are an ideal tool to facilitate this growth. Higgins and Rodriguez (2006)
show that some high-tech firms successfully outsource their Research & Development (R&D) efforts through acquisitions. In addition,
acquisitions of small innovative companies are an integral part of the strategy of several large high-tech firms. The acquisition of
innovative new entrants is a means of strengthening the internal R&D process and diversifying technological capabilities for these
companies (Desyllas & Hughes, 2008). Moreover, Bostan and Spatareanu (2018) find that the level of innovation increases following
acquisitions of minority shares (< 50% of the capital) in innovative start-ups with budgetary constraints.

⁎
Corresponding author at: IDRAC Business School, 47 Rue du Sergent Michel Berthet, 69009 Lyon, France.
E-mail address: mohamedfiras.thraya@idraclyon.com (M.F. Thraya).

https://doi.org/10.1016/j.hitech.2019.100354

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From an entrepreneurial perspective, the start-up marketing strategy of selling the business to a larger firm allows the en-
trepreneur to make profits from the ‘market of ideas’ (Gans & Stern, 2003). And also, given the extent to which many young
companies face difficulties for obtaining finance or additional resources to develop and refine their R&D activities, the acquisition
operation by a financially strong larger firm could be a means to ensure the financing, as well as the continued development of the
newly-created company's technology (Andersson & Xiao, 2016). This type of interaction between new entrants and large firms would
naturally foster innovation capacity and economic growth.
M&A in the high-tech sector have continued to increase over recent years. In, 2015, the auditors Ernst & Young showed an
increase in high-tech M&A activity, and predicted steady growth steadily over the coming years (Lusyana & Sherif, 2016). However,
M&A also represent tension-generating transactions that can intensify divergent interests between management and shareholders
(Shleifer & Vishny, 1997). These differences in interest can lead to conflicts regarding the strategic direction of the firm. Corporate
governance plays a fundamental role in strategic investment orientations and ensures that these conflicts are reduced to a minimum.
An efficient internal governance system tends to mitigate such conflicts and reduces the information gap between leaders of the firm
and the wider stakeholders. Such a system is generally based on effective mechanisms such as transparent and sufficiently in-
dependent boards of directors and audit committees, executive compensation well-indexed to the firm's income, regular distribution
of stock options, efficient shareholder activism and transparent disclosure of financial information (Adegbite, 2015). In the absence of
effective governance, leaders of the firm may venture into unprofitable acquisitions that serve their own private interests, for ex-
ample, they may seek targets that increase their compensation and strengthen their reputation and their entrenchment (Grinstein &
Hribar, 2004; Harford & Li, 2007). Such opportunistic behaviour could have adverse consequences on the performance of the ac-
quiring firm. As a result, many demanding investors have become increasingly sensitive to corporate governance practices. Thus,
rating agencies (S&P, Moody's and Fitch) and specialized services (GMI, ISS) have integrated the quality of corporate governance into
their rating process. These organisations have thus defined scores to more accurately assess the quality of governance adopted by the
firm.
High-tech firms generally face great uncertainties in maintaining good performance. There are two main reasons for uncertainty
in the high-tech industry: (i) continuous and rapid technological advances, and (ii) low visibility of future trends owing to high
volatility in demand for technological products (Wu, Levitas, & Priem, 2005). Indeed, the uncertainties related to these investments
could cause a high information asymmetry between insiders and external shareholders. While the former has adequate information
on the R & D process, the latter has limited information on the innovation process – thus, the return on investment remains am-
biguous for them. In this context, the shareholders may react negatively in the case of an acquisition announcement because of the
strong information asymmetry. Several studies show the positive effects of corporate governance on firm valuation (Adegbite, 2015;
Black, Bernard, Jang, & Kim, 2006; Gompers, Ishii, & Metrick, 2003). Other studies show significant effects of particular aspects of
governance, for instance board independence (Dahya, Golubov, Petmezas, & Travlos, 2016) or the market for corporate control
(Masulis, Wang, & Xie, 2007) on the performance of acquisitions.
Acknowledging the existing literature, the objective of our study is to examine whether corporate governance, measured by a
synthetic score including 22 key variables, could improve investors' perception, and consequently the stock market performance of M
&A transactions initiated by French high-tech firms. The French context presents a number of specific attributes. Firstly, and despite
the growing presence of institutional investors, many firms are still owned and controlled by the state or by families. Secondly,
French companies have the choice between a one-tier board and a two-tier board (Belot, Ginglinger, Slovin, & Sushka, 2014). Among
advanced economies, board structure has evolved into two broad types. One is a unitary (single) board structure that comingles the
advisory and monitoring functions intrinsic to its responsibilities, and is composed of both managers and independent directors. The
other is a two-tier (dual) board structure, consisting of a management board that manages the firm's operations, plus a separate
supervisory board charged with overseeing the firm's activities, including the appointment and monitoring of corporate managers.
Thirdly, French firms with high-tech assets generally adopt multi-resource governance that pools individualised disciplinary in-
struments (salary incentives, hierarchical control, etc.) and innovative and empowering collective practices (teamwork, workers'
autonomy, etc.) (Cézanne, 2010). Lastly, since 2008, joint efforts by the private sector and the French government have led to a
significant increase in R&D in France. The results of our study mainly show that corporate governance plays a moderating role in
market reaction when a merger or acquisition is announced by a high-tech firm. We find that a higher governance score improves
investors' perception of M&A transactions initiated by French high-tech firms. This observation is also confirmed even when firms are
targeting companies from other sectors of activity. As a final point, the positive effect of governance is relatively greater in the high-
tech sector compared to other sectors of activity. To this end, we draw from the existing literature to put forward the following
research question:
What role could corporate governance play in investor perception of M&A announcements initiated in the high-tech context?
This article continues as follows. In the first section, we review relevant literature and develop our hypotheses. In the second
section, we detail the research methodology. The analysis of the results is the subject of the third section. To finish, the final section
concludes our study.

1.1. Theoretical framework and development of hypotheses

In this section, we present the literature on the various links between corporate governance, performance and M&A transactions
in the context of high technology. We then develop the hypotheses.


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

1.1.1. The relationship between governance and performance in the high-tech sector
In the high-tech sector, managers are called upon to take risks in order to innovate (Li & Tang, 2010), and consequently the role of
corporate governance in strengthening or limiting managers' engagement in the innovation process appears to be crucial. By and
large, there are three widely adopted internal governance mechanisms that influence management behaviour and thus corporate
performance – as will be discussed in the ensuing paragraphs. These mechanisms focus on performance-based managerial com-
pensation, ownership structure and the board of directors (Beiner, Drobetz, Schmid, & Zimmermann, 2006; Black et al., 2006; Brown
& Caylor, 2009; Dahya et al., 2016).
Firstly, compensation contracts with a fixed and a variable portion tend to moderate risk taking by managers in the high-tech
sector. This argument is supported by He and Wang (2009), who show that these remuneration contracts positively moderate the
relationship between R&D investment and the value of high-tech firms. Ying-Fen, Liao, and Chang (2011) support the positive
relationship between managerial compensation and the firm's performance, and indicate that this mechanism is widely used in
Taiwan's high-tech industry. In their study, the authors also show that manager ownership leads to a higher return in high-tech firms.
Furthermore, Le, Walters, and Kroll (2006) argue that manager ownership is an effective instrument for aligning executive and
shareholder interests even in high-tech firms.
Secondly, and with respect to ownership structure, Choi, Park, and Hong (2012) examined the role of Korean corporate ownership
concentration and shareholder typology as governance mechanisms for 301 high-tech firms. Their results show that the concentration
of ownership is ineffective in monitoring and influencing the behaviour of managers related to R&D investments, however, the
presence of institutional and foreign investors positively influences the performance of firms' technological innovation. Conversely,
managerial ownership and the State ownership will negatively influence the performance of these firms. Le et al. (2006) also show
that institutional investors have a positive effect on the performance of US high-tech firms. Similarly, based on a study of 77 newly
ranked high-tech firms in the United States, Kor (2006) revealed that the presence of institutional investors can mitigate the sub-
optimal investment problems. Institutional investors thus represent an effective governance mechanism in high-tech firms. While
Saleh, Rahman, and Hassan (2009) put forward that family ownership and managerial ownership can have a negative impact on the
performance of Malaysian high-tech firms, André, Ben-Amar, and Saadi (2014) found a positive relationship between family own-
ership of Canadian high-tech firms and acquisition performance.
Thirdly, regarding the board of directors, the literature on agency theory supports the notion that the board's primary mission is to
closely monitor the behaviour of managers (Fama & Jensen, 1983). However, agency theory is unclear as to the board's supervisory
role in risk taking by managers. Indeed, strategies based on fairly sophisticated R&D activities could make understanding investment
choices quite complicated for directors. Zajac and Westphal (1994) argue that independent directors are not able to effectively
supervise managers in high-tech firms because they have difficulty understanding complicated strategies based on the fairly so-
phisticated R&D activities. Thus, directors may not always support innovation in the firm insofar as they are wary of complicated,
uncertain and very risky projects (Perel, 2002). He and Wang (2009) showed a non-significant relationship between board in-
dependence and the performance of 736 high-tech firms. Similarly, Kor (2006) found that a relatively large number of outside
directors is not necessarily an effective governance mechanism for technology firms in terms of R&D expenditures. The author argues
that while control by an independent board could bring benefits, the high cost of board oversight in the high-tech sector could exceed
those benefits.

1.1.2. The performance of M&A in the high-tech sector

With reference to scholarly publications, several studies have focused on the high-tech M&A conundrum, but the results are non-
conclusive (Jensen & Ruback, 1983; Martynova & Renneboog, 2008; Sudarsanam & Mahate, 2003). The idiosyncratic, high-growth,
high-risk nature of the high-tech industry draws attention to the issue of wealth creation in firm acquisitions within this sector. Singh
(2015) argues that the high-tech sector remains one of the most promising sectors in terms of market value creation. This promise of
value creation is supported by the increasing use of technology in everyday life. It is widely acknowledged that the market tends to
show very high expected benefits from certain high-tech acquisitions. The fairly strong competition in the high-tech world is sup-
posed to be one of the main causes of the overestimation of the performance of acquisitions (Rossi, Tarba, & Raviv, 2013). Another
standpoint concerns the recent amplification of young high-tech start-ups. Based on the analysis of the performance of US high-tech
acquiring firms between 2007 and 2014, Lusyana and Sherif (2016) found abnormal positive short-term returns; they explain their
results by the market's over-optimism about the future synergies of the merged high-tech firms. Similarly, Kohers and Kohers (2000)
indicated that, regardless of the payment method, firms acquiring high-tech targets tend to achieve positive and significant abnormal
returns.
Other research suggests that the complexity of high-tech firms leads to uncertainty and misperception of the market. For example,
empirical studies show poor performance by acquiring firms in several high-tech fields such as biotechnology and software (Laamen
& Keil, 2008; Ragozzino, 2006). More recently, André et al. (2014) found that the performance of acquisitions initiated by high-tech
firms could be higher as a result of the presence of certain governance mechanisms, notably institutional and family ownership, and
the small size of the board of directors. Thus, taking into consideration the first part of this literature review, it can be put forward
that good corporate governance is likely to improve the performance of high-tech firms. We suggest that effective governance can
reduce market uncertainty and misperception, improve the appreciation of incentives related to acquisitions initiated by high-tech
firms and ensure better performance.
Hypothesis 1. Better governance leads to a better perception of M&A projects initiated by high-tech firms.


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

1.1.3. Acquisitions of targets from different sectors of activity

An impairment loss is generally associated with the combination of two firms from different sectors (Denis, David, Denis, & Sarin,
1997; Lang & Stulz, 1994). This reduction is largely explained by the high degree of information asymmetry due to the complexity of
the operation and management planning of entities in different sectors (Nam, Tang, Thornton, & Wynne, 2006). Thus, the level of
information asymmetry should increase further when a high-tech firm decides to diversify. Moreover, the reduction in value can also
be explained by the presence of private interests on the part of the managers in the acquiring firm. Diversification can enrich the
power of the manager in the case of a high-tech company. Indeed, the appropriation of specific knowledge related to the R & D
process by the manager accompanied by one or more diversification operations could make his/her dismissal from management more
awkward insofar as his replacement could possibly cause coordination problems between firms in different sectors (Grinstein &
Hribar, 2004; Harford & Li, 2007; Thraya, Firas, & Albouy, 2013). Moreover, Boubaker, Hamrouni, and Liang (2015) found that
effective governance mechanisms will improve the firm's communication policy, thereby reducing the information asymmetry be-
tween insiders and other stakeholders. We put forward that a good corporate governance system improves the transparency of
specific and strategic information related to diversification and therefore reduces the information asymmetry between management
and shareholders in the event of a high-tech firm deciding to diversify. We thus assume that a firm qualified as having good gov-
ernance could achieve better performance in diversification operations initiated by high-tech firms.
Hypothesis 2. Better governance slows down the decline in value during diversification operations initiated by high-tech firms.

1.1.4. The Specific role of governance in the high-tech sector

Finet, Hubert, Depret and Labie (2005) found that the nature of the governance structures of innovative firms depends on their
initial economic model (strategic and technological positioning, nature of financing and shareholding, profile of managers, etc.), their
technological and strategic choices and the nature of the sources of uncertainty (socio-economic, regulatory, political, financial, etc.)
in the environment within which they operate. Thus, the impact of governance mechanisms on performance differs in the high-tech
sector (Le et al., 2006). Compared to other sectors of activity, the performance of high-tech firms depends largely on the talent of
their human capital. This capital is an essential resource for the survival and growth of these businesses. Thus, good governance
within these firms should bear in mind the role played by human capital, and take appropriate measures to contribute to their loyalty
and enrich their skills. Cézanne (2010) argues that firms, which are intensive in specific human capital, must have a governance
model that stabilises relationships that formally and informally structure power over human assets and that encourage resource
holders to converge towards an organisational objective that promotes the collective integrity of the firm.
Previous academic studies have highlighted the complexity of the innovation process and the opacity of R&D activities
(Chowdhury, Shamsud, & Geringer, 2001; Geoffron, 2001). This complexity allows managers to gain an advantage in terms of specific
knowledge of the innovation investment process. This advantage could enable them to avoid disciplinary measures, to the extent that
the control of investment choices by the board of directors thus becomes a rather difficult task. Under certain conditions, and in order
to secure their innovation process, managers can also benefit exclusively from strategic information. Other stakeholders are deprived
of this information. A strong information asymmetry could thus occur between managers and other stakeholders. According to
agency theory, information asymmetry leads to agency conflicts in the organisation. Thus, all other things being equal, we could
expect more intense agency conflicts in high-tech firms relative to other industries in the event of a merger or acquisition an-
nouncement. The mission of governance is to mitigate these conflicts. Thus, in the case of weak governance, the market may be more
cautious of a lack of transparency regarding investments or acquisitions – and the market response may be relatively weaker in the
high-tech sector compared to other sectors. Effective governance, on the other hand, requires decision makers to communicate more
about the potential gains and risks of the merger or acquisition transaction and, therefore, assures investors vis-à-vis the high-tech
firm's investment projects. Accordingly, assured by the contributions of the operation, these investors will react in a more favourable
way.
Hypothesis 3. The impact of governance on the perception of M&A projects is relatively greater in the high-tech sector than the other
activity sectors.

2. Methodological approach

In this section, we present the sample of our study, the variables retained and the descriptive statistics of these variables.

2.1. The sample

Our sample consists mainly of mergers and acquisitions initiated by French firms listed on the Paris stock exchange. We initially
collected data for 3073 transactions initiated by 623 firms between 2005 and 2016. We eliminated transactions that are in progress or
rumoured, as well as transactions that do not involve a business combination such as recapitalisations, redemptions and spin-offs, and
retained only transactions with acquisition amounts greater than $1 million. Of the remaining 333 firms, we were able to collect data
on governance scores for 102 firms that initiated 437 transactions. In addition, and in order to ensure a proper interpretation of the
market's reaction, we eliminated transactions where the reaction could be hampered by the presence of other important events (for


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

example, the announcement of firm's income) posted in company press releases published on the AMF1 website during the period
[−5 days, day of the event, +5 days] (McWilliams & Siegel, 1997). Of the remaining 405 transactions, 56 were initiated by high-tech
firms. Lastly, we compared these 56 transactions with a control sample where each transaction is matched with two control trans-
actions. These 112 control operations are initiated by firms of a similar size to high-tech acquiring firms in terms of market capi-
talisation but belong to other sectors of activity. Data relating to mergers and acquisitions are mainly collected using the Thomson
One Banker Deals database and the Datastream database. The data relating to the governance score were collected manually from the
firms' annual reports and from the Dafsaliens database.

2.1.1. The variables selected for the study

2.1.1.1. The dependent variable. In order to reflect investors' general perception of the merger or acquisition decision initiated by the
high-tech acquiring firm, we followed the methodology of event studies by examining the market response measured by the
cumulative abnormal returns (CAR), generated when the transaction was announced around the event period [−1 day, +1 day].
These returns therefore make it possible to measure the short-term performance which represents our dependent variable and,
furthermore, to know the investors' appreciation for the operation in question. The estimation period is 200 days from −240 days to
−40 days before the event. The market model is used to estimate expected returns. This model, initially put forward by Fama et al.
(1969), has been frequently used in practice and particularly in recent studies (Deng, Jun-Koo, & Low Buen, 2013). The SBF 250
index is used to calculate daily market returns.

2.1.1.2. The main explanatory variable. The explanatory variable of interest is the governance score. Previous studies have relied on
governance scores developed by rating agencies (S&P, Moody's and Fitch) or specialized services (GMI, ISS) to conduct their analyses
(Doidge, Karolyi, & Stulz, 2004; Durnev & Kim, 2005). Consistent with other research (Gompers et al., 2003), we constructed our own
score to assess the impact of governance. This score is composed of various criteria defined and operationalised with regard to the
literature reviewed and the criteria used by the rating agencies in this field. Research has shown that good performance is positively
associated with several internal governance criteria, notably the independence of the board of directors, the separation between the
functions of the chairman of the board of directors and the chief executive officer, the size of the board, the nature of executive
compensation, employee activism and institutional shareholding (Beiner et al., 2006; Black et al., 2006; Brown & Caylor, 2009;
Dahya et al., 2016).
Furthermore, Drobetz, Schillhofer, and Zimmermann (2004) introduced the audit committee as a specific element of their study.
They argued that good corporate governance is primarily represented by the audit process. Black et al. (2006) constructed a corporate
governance score based on six criteria: shareholder rights, board of directors, audit process, independent directors, transparency of
information and ownership structure. These authors have shown that corporate governance is an important factor that explains the
value of Korean firms. More recently, further criteria for good governance have been identified. The ceiling on golden parachutes has
been the subject of governance recommendations by AFEP2 (, 2015). In addition, St-Onge and Magnan (2013) show that the fem-
inisation of boards of directors is considered an indicator of good corporate governance. We selected 22 key governance variables
divided into three themes to construct our own score. Table 1 defines the measurement of these different variables. The governance
score computed using the Data Envelopment Analysis (DEA) method varies between 0 and 1. We explain the calculation method in
appendix 1.

2.1.1.3. Control variables. Control variables refer to variables that have an impact on performance around the announcement date,
and are commonly used in existing literature. These variables relate to the relative size of the target (size), the listing of the target firm
(listed), the method of payment (cash), the sector of activity (sector), the financial leverage of the acquirer (leverage), the ex-ante
participation in the target (toehold), the number of successive acquisitions (succession), the presence of multiple acquirers (multiple),
the location of the transaction (foreign). The definition of these variables can be found in the appendix 2.

2.1.2. Descriptive statistics

Table 2 shows the descriptive statistics for our sample. Panel 1 shows the statistics for the high-tech sample and panel 2 shows the
statistics for the control sample. The first noteworthy result from this table comes from the RAC; significantly positive for both
samples. This result confirms many studies focusing on the reaction of the French market around the announcement date (Bessière,
1999; Hamza, 2009; Thraya et al., 2013). The median high-tech sample score equals 1, therefore half of this sample has an efficient
governance score. The debt level of high-tech acquiring firms is low with an average level of 14%, which represents half the debt level
of the control sample. Diversification is less used by the high-tech sample, where 75% of acquisitions target the same sector, while
50% of transactions initiated in the other sectors are diversification transactions. Lastly, 82% (100% - 18%) of the target firms in our
sample are not listed and most of these targets represent independent high-tech companies (not subsidiaries). The acquisitions of
these targets are friendly deals and the majority of the financing for these acquisitions was in cash. We can thus assume that these
small innovative companies have agreed to be acquired by large listed firms in order to support the financing of their activities,
strengthen the internal R&D process and diversify their technological capabilities (Andersson & Xiao, 2016; Bostan & Spatareanu,
2018; Desyllas & Hughes, 2008).

1
Authority of the French market
2
AFEP: Association Française d'Economie Politique


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Table 1
Corporate governance variables.
Themes Variables Measurement

Size Total number of directors on the board

The functioning of the Board of
Directors
Independence
Duality
Activity
Participation
Audit committee
Nomination committee
Compensation committee
Audit committee meetings
Nomination committee meetings
Remuneration committee meeting
Audit committee independence
Independence of the nomination
committee
Independence of the remuneration
committee
Ownership of the manager
Concentration of capital
Institutional ownership
Employee ownership
Percentage of independent directors on the board
A dummy variable that takes the value of ‘1’ if the CEO is the chair of
the board and ‘0’ if not.
Total number of board meetings per year
Director attendance rate at meetings
The total number of directors on the audit committee
The total number of directors on the Nomination Committee
The total number of directors on the Compensation Committee
The total number of audit committee meetings per year
The number of meetings of the Nomination Committee
The total number of meetings per year of the Compensation
Committee
The percentage of independent members of the audit committee
The percentage of independent members of the appointments
committee
The percentage of independent members of the Compensation
Committee
The percentage of capital held by the firm's CEO
The percentage of the capital held by the five largest shareholders
The percentage of capital held by institutional investors
The percentage of capital held by employees

Ownership structure
Characteristics of the manager Length of service The number of years in the function
Age The manager's age
Remuneration Remuneration + bonus
Training Training level of the manager

Table 2
Descriptive analysis.
Variable No. Mean Median Stand. dev. p5 p95

Panel 1.
CAR (%) 56 1.34** 1 4.88 −7.11 10.73
Score 56 0.70 1 0.41 0.03 1
Size 56 0.12 0.04 0.16 0 0.36
Payment (cash) 56 0.84 1 0.37 0 1
Listed 56 0.18 0 0.39 0 1
Sector 56 0.75 1 0.44 0 1
Toehold 56 2.07 0 10.42 0 4.50
Leverage 56 0.14 0.13 0.12 0 0.35
Succession 56 0.16 0 0.37 0 1
Multiple 56 1.02 1 0.13 1 1
Foreign 56 0.34 0 0.48 0 1

Panel 2.
CAR (%) 112 0.72* 0 4.29 −4.41 6.69
Score 112 0.57 0.47 0.38 0.02 1
Size 112 0.14 0.03 0.29 0 0.54
Payment (cash) 112 0.83 1 0.38 0 1
Listed 112 0.18 0 0.38 0 1
Sector 112 0.50 0.50 0.50 0 1
Toehold 112 7.25 0 17.51 0 50
Leverage 112 0.28 0.24 0.21 0.01 0.70
Succession 112 0.26 0 0.57 0 1
Multiple 112 1.02 1 0.13 1 1
Foreign 112 0.50 0.50 0.50 0 1

Please note: the tables show the descriptive statistics of the main variables used for the sample of transactions initiated by high-tech firms (panel 1)
and for the control sample (panel 2). ***, **, * denote significance at the respective thresholds of 1%, 5% and 10%. See appendix for definition of
variables.


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

Table 3
The governance score of high-tech acquiring firms.
Hi-tech Governance score No. CAR (%) Mean test

t-stat z-test

Panel 1.
Total sample High score 36 2.60*** 2.75*** 2.68***
Weak score 20 −0.94
Diversified Sample High score 7 4.66*** 2.80*** 2.10**
Weak score 7 −1.18

Governance score Firms N CAR (%) Mean test

t-stat z-test

Panel 2.
High score Hi-tech 36 2.51*** 1.89 ** 2.77***
Others 56 0.55
Weak score Hi-tech 20 −0.93 −1.85* - 1.27
Others 56 0.87

Note: This table shows the cumulative abnormal returns (CAR) for high-tech acquiring firms (panel 1) and compares these CAR with those of firms in
other sectors (panel 2) based on the governance score. The score is low when it is below the median and high when it is not. The mean test is
generated by a parametric test (Student statistics) and a non-parametric test (Kruskal and Wallis statistics). ***, **, * denote significance at the
respective thresholds of 1%, 5% and 10%.

2.2. Analyses

We conducted analyses to examine the effects of governance on the perception of mergers and acquisitions initiated by high-tech
firms. In univariate analyses, we use mean difference tests using a parametric test (Student statistic) and a non-parametric test
(Kruskal and Wallis statistic). In multivariate analyses, we use cross-sectional regressions with CAR around the period [−1 day,
+1 day] as the dependent variable and the governance score as the main independent variable as well as the other control variables
mentioned above. In order to remedy any problem of normality, heteroscedasticity or outliers that may affect our data, we use the
Huber-White sandwich technique, which allows us to have a fairly robust estimate of coefficients and standard errors (White, 1980).
Finally, several firms initiated more than one operation during the sampling period, so the standard errors are ‘clustered’ for each firm.

2.2.1. Governance and performance of high-tech acquirers

To the extent that the governance score represents our main explanatory variable, we subdivided the total sample into the median
of this variable in Table 3. The score is low when it is below the median and high when it is not. Panel 1 in Table 3 shows that the
performance of high-tech acquiring firms with a good governance score is significantly higher than that of firms in the same sector
with a low score (t stat =2.75). According to this first result, good governance seems to be a determining factor for the market's
reaction when announcing a merger or acquisition by a high-tech firm. We also note that the performance of these firms with good
governance is particularly better in the case of diversification operations (CAR = 4.66). Good governance thus ensures better
communication within the firm concerning the motivations for choosing targets in different sectors, and consequently reduces the
strong informational asymmetry between managers and investors in the event that a high-tech firm decides to acquire a company
belonging even to another sector of activity.
The two models in Table 4 focus on high-tech acquiring firms. They show that the coefficient of the governance score variable is
significant, confirming the positive relationship between good governance and short-term performance observed during M&A
transactions, particularly diversification transactions. We note that a higher governance score improves investors' perception of high-
tech firms and assures them of the investment potential, particularly for mergers and acquisitions. These results confirm the studies
that show the positive effects of governance on enterprise valuation (see for example Adegbite, 2015; Black et al., 2006; Dahya et al.,
2016; Gompers et al., 2003; Grinstein & Hribar, 2004). We thus validate our first two hypotheses. We also note in Table 4 that the
coefficient of the ‘listed’ variable that refers to the listed targets is significantly negative. Thus, the market reaction is more favourable
to the acquisition of smaller firms, which are generally younger. According to Draper and Paudyal (2006), the acquisition of unlisted
companies is more profitable in terms of value creation. This result also confirms the advantages provided by the combination
between large listed high-tech firms and small innovative companies (Andersson & Xiao, 2016).

2.2.2. The specific role of governance in the high-tech sector

In order to further examine the role of the governance score in the case of high-tech acquiring firms, we compare, in panel 2 of
Table 3, the performance of these firms with that of the other firms in the control sample by distinguishing between the case of a high
governance score and the case of a low score. In the first case, the difference tests show that high-tech firms perform significantly
higher CAR than other firms (t-stat = 1.89; Z-test = 2.77). It should be stressed that the latter are already achieving positive and
significant returns. In the case of a low score, the results tend to be reversed and the CAR of high-technology acquiring firms become


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

Table 4
Governance and performance of high-tech acquiring firms.
Variables High-tech acquirers

(1) (2)

CAR (−1, 1) CAR (−1, 1)

Score 4.006*** 5.674**

(2.853) (3.145)
Size 9.587 9.887
(1.533) (0.635)
Payment −0.688 6.594*
(−0.261) (2.116)
Listed −2.922** −2.175
(−2.606) (−1.165)
Sector −1.131 –
(−1.578)
Toehold 0.003 0.024
(0.005) (0.579)
Leverage −8.215 3.157
(−1.605) (0.386)
Succession −1.690 −3.367
(−1.298) (−1.046)
Multiple −18.40*** –
(−5.577)
Foreign −0.012 2.440
(−0.011) (0.628)
Constant 19.51*** −8.744***
(3.694) (−5.831)
Observations 56 14
Clusters 21 8
R2 0.45 0.77
R2 adjusted 0.32 0.41
F 3.61 2.11

Note: This table shows the results of the cross-sectional regression analysis. The dependent
variable is the CAR (cumulative abnormal returns) calculated over a 3-day event period [−1,
+1]. The independent variables concern the governance score (score); the relative size of the
target (size), the method of payment (payment), the target quotation (listed), the sector of
activity (sector), the ex-ante participation in the target (toehold), the leverage effect of the
acquirer (leverage), the number of successive acquisitions (successive), the presence of
multiple acquirers (multiple) and the location of the transaction (foreign). See appendix 2 for
the definition of these variables. The study period runs from 2005 to, 2015. The robust
Student t statistics are in brackets below the coefficients. Standard errors are adjusted for
heteroscedasticity. ***, **, * denote a significance at the respective thresholds of 1%, 5% and
10%.

negative and lower than those of acquiring firms in other sectors. These results show the particular importance of corporate gov-
ernance in the high-tech sector.
In Table 5, we add a binary variable taking the value 1 when the acquiring firm is a high-tech firm and 0 otherwise. This variable
is significantly positive in the first model in Table 5, which exclusively examines firms with a high governance score. This result
confirms the superiority of CAR performed by high-tech firms compared to other firms in the case of an efficient governance system.
In model 2, the coefficient of this variable becomes significantly negative, thus reaffirming the relative weakness of the CAR per-
formed by high-tech firms in the case of a low governance score. To further confirm these results, we add to Model 3 in Table 5 an
interaction variable between the high-tech sector and the governance score, which takes into account only well-governed high-tech
firms. This variable is significantly positive. These results thus show a more effective role for good governance in improving the
performance of acquisitions initiated by high-tech firms. We validate the assumption that the effect of governance on acquisition
performance is relatively greater in the high-tech sector.
In the first theoretical part of this article, we argued that conflicts of interest tend to be more intense in high-tech firms relative to
other industries. This high intensity is due to difficulties in predicting returns on investment and the appropriation of specific
knowledge and strategic information by managers in this sector (Chowdhury et al., 2001; Geoffron, 2001). Our analyses show that
good governance tends to reduce this intensity by encouraging management to communicate better about the innovation investment
process and thus reduce the information asymmetry between management and shareholders in the event of a merger or acquisition
announcement. We contribute to the literature that puts forward that the market tends to react very favourably to announcements of
acquisitions in the high-tech sector (Kohers and Kohers & Kohers, 2000; Rossi, Tarba and Raviv, 2013; Lusyana & Sherif, 2016) by the
moderating role of corporate governance in the market's positive assessment of acquisition projects.


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

Table 5
High-tech acquirers and acquirers from other sectors.
Variables High score Weak score Total sample

(1) (2) (3)

CAR (−1, 1) CAR (−1, 1) CAR (−1, 1)

Hi-Tech 2.493** −2.269*** −1.831***

(2.268) (−3.915) (−2.819)
Score – – 0.120
(0.107)
Score high-tech – – 3.653***
(2.908)
Size 7.186 0.602 2.166
(0.993) (0.374) (0.812)
Payment 0.956 1.334 1.160
(0.814) (1.117) (1.352)
Listed −3.782 −0.420 −1.699
(−1.608) (−0.219) (−1.245)
Sector −2.420** 0.199 −1.074
(−2.445) (0.283) (−1.429)
Toehold 0.054 0.0538 0.055
(0.965) (0.706) (1.157)
Leverage −1.518 −4.246** −2.631*
(−0.745) (−2.241) (−1.884)
Succession −0.576 −0.420 −0.525
(−0.731) (−0.521) (−1.016)
Multiples −2.057 – −2.454
(−0.346) (−0.497)
Foreign −0.444 −1.067 −1.020
(−0.399) (−1.134) (−1.369)
Constant 3.580 1.015 3.731
(0.551) (0.853) (0.719)
Observations 85 83 168
Clusters 36 46 65
R2 0.21 0.18 0.15
R2 adjusted 0.10 0.08 0.09
F 4.24 2.05 2.97

Note: This table shows the results of the cross-sectional regression analysis. The dependent variable is the cumulative abnormal returns
calculated over a 3-day event period [−1, +1]. The independent variables concern the governance score (score); the relative size of
the target (size), the method of payment (payment), the target quotation (listed), the sector of activity (sector), the ex-ante participation
in the target (toehold), the leverage effect of the acquirer (leverage), the number of successive acquisitions (successive), the presence of
multiple acquirers (multiple) and the location of the transaction (foreign). See appendix 2 for the definition of these variables. The study
period runs from 2005 to, 2015. The robust Student t statistics are in brackets below the coefficients. Standard errors are adjusted for
heteroscedasticity. ***, **, * denote significance at the respective thresholds of 1%, 5% and 10%.

3. Conclusion

This article focuses on the importance of corporate governance in French high-tech firms. Drawing from the existing literature,
our research question reflects our intention to examine the role of corporate governance for improving investor perception of M&A
announcements initiated in the high-tech context. Academic research suggests that innovative corporate governance systems need to
be differentiated (Cézanne, 2010; Le et al., 2006). Based on our study, we show that efficient governance system based on traditional
mechanisms (the functioning of the board of directors, ownership structure, characteristics of the manager) could improve the
performance of these firms in the case of M&A projects.
Thus, the results of our work show the positive effects of corporate governance, measured by a score including various variables
derived from codes of good governance practices, on short-term performance when announcing mergers and acquisitions initiated by
high-tech firms. Given the strong uncertainties related to future financial flows in the high-tech sector, we assume that the main effect
of governance is the improvement of management communication policy and the transparency of specific information relating to
investments in the innovation process. Hence, these managers are less inclined to appropriate strategic information. The positive
effects of good governance are also confirmed in the case of diversified transactions, which are generally characterised by strong
information asymmetry between decision makers and other stakeholders. Effective governance, in this particular case, maintains
investor confidence that the objective of diversification operations is indeed to reduce operational risk associated with R&D activities.
Some academic research provides evidence that the market reacts very favourably when announcing mergers and acquisitions in
the high-tech sector. This favourable response is due to the fairly high competition in this sector and the recent amplification of high-


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

tech young start-ups Kohers & Kohers, 2000; Rossi, Tarba and Raviv, 2013; Lusyana & Sherif, 2016). Other research shows poor
performance by acquiring firms in several areas of high technology due to the complexity and uncertainty in this sector that can lead
to misperceptions of the market (Laamen & Keil, 2008; Ragozzino, 2006). We moderate the results of our study by introducing the
governance score variable. In the case of a high governance score, high-tech acquiring firms achieve CAR that are highly positive and
even higher than the average CAR of firms in other sectors. In the case of a low governance score, the high uncertainty of returns on
investment leads high-tech bidders to achieve relatively lower CAR than in other sectors. Thus, our research encourages high-tech
firms to improve their internal corporate governance mechanisms before adopting strategic acquisitions.
In addition, this research is also in line with recent research (Andersson & Xiao, 2016; Bostan & Spatareanu, 2018), which
demonstrates that small innovative firms agree to be acquired through cash payment in order to support the financing of their
activities and diversify their technological capabilities.

3.1. Limitations and avenues for future research

Despite these pertinent and interesting findings, our study presents some limitations. First, DEA results are sensitive to the choice
of input variables. To mitigate this problem, Botti, Boubaker, Amal, and Bernardin (2014) argues that the choice of inputs should be
based on sound literature so that the chosen inputs alone will influence the outputs. The input variables used in our article are
considered as the most important characteristics of corporate governance in the literature that influence the extent of monitoring.
Moreover, applying a DEA approach for a small sample of firms increases the likelihood that a given firm will be found relatively
efficient, thus limiting the generalizability of our conclusions. Next, our research design does not allow us to disentangle which item
of corporate governance operates ineffectively compared to the others. Future research could therefore focus on the long-term
performance of high-tech acquisitions to mitigate the effect of short-term over-reaction in the high-tech sector.

Declaration of Competing Interest

No potential conflict of interest was reported by the authors. This research did not receive any specific grant from funding
agencies in the public, commercial, or not for-profit sectors.

Appendix A. Appendix 1: Governance score using the DEA method

In our article, the DEA method determines the efficiency frontier showing the best firms in terms of corporate governance
practices. Thus, we consider the governance variables used as inputs that maximize outputs represented by performance criteria:
Tobin's Q and return on equity (ROE). Indeed, this non-parametric method does not require any explicit specification of the re-
lationship between inputs and outputs, which is a major advantage of the approach. The DEA method evaluates the efficiency of N
decision-making units (DMUs). Fig. 1 shows that the efficient frontier is defined by the dotted line, from the coordinates of each
perfectly efficient DMU. In this figure, we find that DM1, DM2, DM6, DM7 and DM8 are perfectly efficient, while DM3, DM4 and DM5
are not. According to the DEA approach, each firm consists of a DMU. The estimated values of parameters calculate the distance of
each observation according to the efficient frontier. The degree of inefficiency computed of each firm varies between zero and
infinity. The degree of efficiency is expressed by the inverse, which varies between zero and one. Thus, the efficiency score is between
0 (total inefficiency) and 1 (perfect efficiency of the units forming the border).
According to the DEA approach, the set of the variables used is translated to all feasible input-output combinations with a
production technology that transforms a vector of N inputs x = (x1, x2…,xN) into a vector of P outputs y = (y1, y2, ….yN). This
possibility set can be simply written as:
T = {(x , y ) R+N + P : x R+N can produce y R+P }

Thus, the efficiency score is obtained by solving the following linear program. Max θ is subject to:

x nj , n = 1……N ypj p = 1. .…P 0, i = 1……m

m m
i i
i xn i yp,
i=1 i=1
i

λ represents the intensity of each production unit, m is the number of firms in the sample, N is the number of inputs used by the
analyzed firm, and P is the number of produced outputs.


M.F. Thraya, et al. -RXUQDORI+LJK7HFKQRORJ\0DQDJHPHQW5HVHDUFK

Fig. 1. The efficient frontier using the DEA method.

Appendix B. Appendix 2: Definitions of variables

Variable Definition

CAR Cumulative Abnormal Returns calculated over a 5-day event period [− 1 day, event day, +1 day]
Score The score is composed of 22 governance variables. These variables concern the functioning of the board of directors, the ownership structure, the
characteristics of the manager; this score varies between 0 and 1
Size The relative size of the target compared to the acquirer estimated by the price paid divided by the market capitalisation of the acquiring firm 4 weeks
before the announcement
Payment A binary variable taking the value 1 when the transaction payment is cash and 0 otherwise
Listed A binary variable taking the value 1 when the target company is listed and 0 otherwise
Sector A binary variable taking the value 1 when the initiator and the target have the same first two digits of the primary SIC code (industrial classification
code) and 0 otherwise
Hi-Tech A binary variable taking the value 1 when the acquiring firm is a high-tech firm according to the Thomson One Banker classification with the
following SIC codes: 3578, 3651, 3674, 7372, 7376 and 7379 and 0 otherwise
Toehold The percentage of the acquiring firm's ex-ante participation in the target
Leverage Total debt excluding convertible bonds divided by the market value of assets (book value of assets less book value of equity plus market value of
equity)
Succession The number of successive acquisitions taking place in the 24 months prior to the announcement date
Multiple Number of firms that submitted bids to acquire the target
Foreign A binary variable taking the value 1 when the target is not a French firm and 0 otherwise

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