Board effectiveness and internalization benefits: Theory and evidence from value creation in cross-border acquisitions

Abstract

Research Summary

We examine how the value created by technological and marketing intangible assets in foreign direct investment (FDI) varies with board effectiveness conditions. Synthesizing internalization and agency theories, we theorize that a firm can better leverage intangibles and create value through acquisitive FDI if its board setup enables effective monitoring and advising. Empirically, we operationalize the “quad” elements of board effectiveness—independence, expertise, bandwidth, and motivation—and account for multiple selectivity related to disclosure decisions and mode choice. Analyzing 675 cross-border acquisitions by U.S. public firms (1998–2016), we quasi-replicate and extend internalization results linking intangibles with abnormal returns upon FDI announcement. Advancing internalization research through corporate governance insights, our findings show that board effectiveness moderates the value-creating effects of intangibles in multinational enterprises' foreign expansion.

Managerial Summary

Why do some multinational enterprises achieve superior returns in their foreign investments while others do not? Our research shows that firms can maximize value from cross-border acquisitions by capitalizing on their technology- and marketing-related intangible assets, such as R&D capabilities or strong brands, provided they have an effective board of directors. Key board attributes of high independence, relevant expertise, sufficient time, and ownership-based incentives significantly enhance the value-creating potential of these assets. This study underscores the importance of board governance in facilitating successful international expansion. It also addresses how to explicitly model the strategic disclosure of intangibles-related information and the foreign expansion mode decision while examining performance outcomes.