Labor Representation on Corporate Boards and Merger and Acquisition Performance

Amirhossein Fard Incheol Kim

March 2019

Abstract

We examine how, in European countries, the presence of board-level employee representatives (BLERs) affects firms’ acquisitions. We find that firms with BLERs engage in fewer acquisition, both domestically and cross-border. Moreover, acquiring firms with BLERs exhibit higher announcement returns and higher post-merger productivity than those firms without these directors. Subsample analyses show that this acquisition effect is more pronounced in firms with more severe agency conflicts and in high coordination industries. Further, we show that compares to those deals completed by firms with no BLERs, those completed with BLERs will have fewer layoffs outcomes two-year post-merger. Overall, our results suggest that BLERs enhances shareholders’ wealth by curbing a firm’s excessive risk-taking behavior. JEL Classification: G34, J54 Keywords: Labor Representation; Employee Directors; Corporate Governance; Mergers and Acquisitions

1. Introduction

The traditional view regarding the theory of the firm describes a firm as a bundle of assets

belonging to the shareholders that are controlled by the hired managers (Grossman & Hart, 1986).

Consistent with this theory, the property right view describes employees as outsiders with limited

contract that cannot be owned by firms, thereby behave as a typical agent. The Power theory of the firm

(Rajan & Zingales, 1998; Carlin & Gervais, 2009; Berk et al., 2010), on the other hand, argues that 1)

employees gain firm-specific investment through having access to the firms’ technologies, and other

resources, 2) they become valuable assets and residual claimant to firms , and 3) entities expect to

receive a return from their investment in this firm-specific human capital, and this requires having a

mechanism in place to protect this investment. One of the ways that firms can protect this investment is

by delegating role to labors in participating in firms’ investment decisions. In the U.S., labors

participation in firms’ management has been somewhat voluntarily taken place either by forming an

organized association (Wilkinson et al., 2014; Lin, Schmid, and Xuan, 2018) or holding ownership (e.g.,

Faleye et al., 2006). This participation, however, has differently evolved in the European countries (such

as Germany, Austria, Denmark, and Norway) as the governments legally mandate firms to elect

employee representatives on the board. In this paper and using a sample of European firms, we

investigate the role of employee presence on the board on firms’ mergers and acquisition decision.

While employee directors generally have the same rights and responsibilities as those directors

elected by shareholders, they may have different objective functions from each other. These differences

come from employee directors’ preference in making decisions that are beneficial to firms’ employees.

Although the presence of employee directors on the board was first established in the early 1970’s, and

as a part of the industrial democracy in Europe, the concept is still getting attention among the

politicians all around the world. French President Emmanuel Macron considers some changes to the

corporate governance, among other issues, that will empower the workers’ participation in firms’ board.

Theresa May, the United Kingdom’s Prime minister, promised to allow workers to participate in firms’

board as a part of her campaign in 2016. In the U.S., Senator Elizabeth Warren proposed a plan to

require companies with more than $1 billion in revenue to allow their workers to have up to 40% of the

board’s seats1. This transformation in employees’ participation globally has given new momentum to the

debate about the role of firms’ human capital in corporations, and how corporates’ policies in protecting

their firm-specific human capital affect their investment decisions.

We choose the mergers and acquisitions (M&As) as investments that have both high economic

value and require board approval to test the roles of employee directors. Moreover, M&As often lead to

large-scale employee turnover in both acquiring and target firms (Atanassov & Kim, 2009; Ofek, 1993;

Kaplan, 1994; Kang & Shivdasani, 1997; Denis & Kruse, 2000). Therefore, the presence of employee

representatives on the board, and their preference in protecting employees’ jobs, are likely affecting the

firms’ approach towards these decisions.

There are two conflicting views on how the employee representatives affect a firm’s acquisition

intensity. On the one hand, firms with these directors may initiate fewer acquisitions given the preference

of these directors in shielding firms’ employees. Moreover, employee directors might be risk-averse board

members whose incentive is to ensure long-term employment of the workers, and they might prefer

investing in projects with no potential risks of employees’ layoff. Meanwhile, there is ample evidence in

the literature confirming labor restructure to be the major consequence of acquisitions (e.g., Gort, 1969;

Jensen, 1993; Mitchell and Mulherin, 1996; Andrade, Mitchell, and Stafford, 2001). Given this scenario

the presence of employee representatives on the board might reduce the number of bid initiation in firms.

On the other hand, these directors might pursue their own benefits in increasing firms’ size and

1 https://www.wsj.com/articles/companies-shouldnt-be-accountable-only-to-shareholders-1534287687

compensation following completing an acquisition. It is well known that CEOs are incentivized to increase

the firm size (Jensen, 1986). If employee directors form an alliance with the empire building CEO to

increase their own benefits (Cronqvist, Heyman, Nilsson, Svaleryd, and Vlachos, 2009; Masulis, Wang,

and Xie, 2017), we might expect to see that their presence on the board is associated with more bid

initiation by firm.

Our empirical results related to the acquisition intensity show that firms with employee

representatives on the board initiate fewer domestic and cross-border acquisitions. In particular, we find

that this presence is associated with 2.3% fewer domestic and 3.1% fewer cross-border acquisitions. This

effect translates into reducing the firms’ investment in M&A activities, following the presence of

employee directors on the board, of more than $10 million per year. This evidence is consistent with the

view that firms with employee representatives avoid engaging in projects with the risks of employees, as

a provider of firm-specific human capital, layoffs. Using 15,709 firm-year observations for more than

2,000 European firms between 2000 and 2014, we show that the presence of employee representatives in

reducing firms’ acquisitions is both statistically significant and economically meaningful.

Next, we investigate the market reaction to those deals with employee representatives and examine

their long-term profitability. Conceptually, employee representatives on the board of acquiring firms can

affect the value-creation in different ways. If these directors fail to protect the acquiring firms’ investment

in human capital, we expect that their presence does not bring any trust and motivations in workers that

in turn will adversely affect the firms’ productivity and performance. In addition, there is evidence in the

literature that employee representatives do not have the necessary supervisory skills to contribute to the

firms’ decision-making (e.g., Gorton & Schmid, 2004), which allow the CEOs to engage in more

acquisitions that have private benefits regardless of their effects on the preservation of the firms’ human

capital. If employee directors are entrenched, as the empire building CEOs, then their presence on the

board is more likely to destroy the trust in employees, make them worry about their future employment,

decrease the employee satisfaction, and negatively affect employees’ performance which would

negatively reflect itself on the acquisition performance.

On the other hand, if these directors aim to protect the firm-specific investment in human capital,

we expect that their effort is associated with more return on investment by employees, higher productivity

and better firm performance. The positive effect of investment in human capital on the firms’ productivity

has been addressed in the management and economic literature (Black & Lynch, 1996; Tsui et al., 1997).

Other works in psychology and strategic human resource management literature find the positive

relationship between investing in human capital and firm performance (e.g., Huselid, 1995; Bowen &

Ostroff, 2004; Becker & Huselid, 2006; Le, Oh, Shaffer, & Schmidt, 2007; Subramony, Krause, Norton,

& Burns, 2008). Moreover, employee representatives could help the acquiring firms’ managers in the

target selection process by providing valuable first-hand production knowledge. For instance, Fauver and

Fuerst (2006) find that employee representatives increase firm value, particularly in industries that require

labors’ specialized skillsets and involvement in the production. Furthermore, there is extant evidence in

the literature confirming that employee satisfaction will bring both shareholders’ wealth and higher firm

performance (e.g., Edmans, 2011; Eccles, Ioannou, & Serafeim. 2014; Edmans et al., 2014). This evidence

predicts that the presence of employee representatives on the board of an acquiring firm is associated with

a higher acquisition return.

To examine the effect of employee representatives on the firms’ acquisition performance we

compiled 2,972 acquisition transactions by over 2,000 European firms over the sample period for which

we have their return available. In an event study framework and by using the cumulative abnormal returns

(CARs) around the deal’s announcement dates as proxies for acquisitions performance, we show that deals,

where acquirers have employee representatives on the board, show 1.07% and 1.13% higher three-day

and five-day returns than those without these directors. This evidence is consistent with the notion that

employee representatives increase the shareholders’ value by protecting firms’ investment in human

capital, increasing employee satisfaction and providing managers valuable first-hand production

information in the process of finding a good target. In other words, market values the employee satisfaction

and firms’ effort in improving its employee welfare which is consistent with the findings of Edmans (2011)

showing the higher value-weighted portfolio consist of 100 best companies to work for comparing to the

industry average. Our sub-sample analyses confirm that these effects are more pronounced when the size

of the deals is larger, in industries where highly skilled workers and industries where high coordination

between employees and board is crucial, and in countries with lower legal provisions supporting the

employees. These results confirm the role of employee representatives in protecting the firm-specific

human capital is more prevalent where the firms’ human capital is more valuable for firms and when there

are less legal provisions supporting the firms’ human capital.

Next, we compare the long-term post-acquisition operating performance of acquirers’ employee

directors on the board with those without. Using returns on assets (ROA) from the 4 years prior to the

announcement to the 4 years following acquisitions as a proxy for firm performance, we find that firms

with employee directors show an average of 40% higher operating performance 4 years’ post-merger.

Overall, this finding suggests that firms with employee directors undertake acquisitions selectively but

add short and long-term value to acquirers through better employee treatment and higher satisfaction as

well as superior knowledge in target selections.

Further, we look at the role of employee representatives in protecting workers following

acquisitions. As noted throughout the paper, one of the major motivations of managers in initiating

acquisitions is to restructure the firms’ labor force. Blair (1999) describes the employment contract to

behave like an options contract. If the employee stays with a firm for the next year, she can acquire

skills that build on the skills she learns this year. Those skills would bring a new stream of returns in

addition to those return generated from the skills on this year. If the employment relationship is

prematurely terminated, however, the option loses its value. There are many evidences in the literature

confirming that the positive stock return and operating performance following an acquisition come at the

cost of large-scale employee layoffs in both acquiring and target firms (Atanassov & Kim, 2009; Ofek,

1993; Kaplan, 1994; Kang & Shivdasani, 1997; Denis & Kruse, 2000; Shleifer & Summers, 1988).

Given their role in protecting employees’ future, employee representatives, presumably, should affect

the acquiring firms’ decision regarding employees’ layoff following an acquisition. In particular, if

employee representatives on the board protect the option value (employees’ contract) in order to save

the firm-specific human capital and their implicit contract with shareholders, we anticipate that their

presence on the board of an acquiring firm is associated with fewer layoffs post-merger.

The results on Table 8 confirm our expectations indicating the role of employee representatives in

preserving firms’ human capital following M&A. In particular, we show that the presence of these

directors on the board is associated with a lower probability of layoffs (30%) two years following an

acquisition. This shows that employee representatives create value for firms not only by improving the

quality of acquisitions but also by protecting the firms’ investment in human capital following amid

acquisition. Further, we show that this reduction in the probability of layoff is more pronounced in

industries with more skilled workers. In particular, in high-coordination and high-intensive industries

where the firms’ investment in human capital is more valuable.

This paper contributes to on-going studies of labor participation in firms’ management and their

role in protecting firms’ human capital in two ways. First, our findings are consistent with the power

theory of the firm (Rajan & Zingalez, 1998) in which the authors argue that employees’ access to firms’

critical resources including machine, exposing to ideas, and working closely with other employees,

make them valuable parts of a firm. Further, this stream of literature argues that creating and sustaining

these resources (human capital) is a big part of firms’ competitive advantage (Cornell & Shapiro, 1987;

Doving & Nordhaug, 2002), and the satisfied employee will create value for shareholders (Edmans,

2011). The current literature on the impact of labor power in firms’ performance shows mixed findings.

On the one hand, employees, when they have power, might solely represent their own welfare, which is

not aligned with shareholder wealth (Jensen & Meckling, 1979; Tirole, 2001). On the other hand, labors’

objective function is close to the shareholders’ in that labors’ wage and job security are highly tied to

firm performance. Moreover, there is ample evidence confirming firms’ policies that protect

stakeholders (including labors) are likely to bring value for shareholders as well (Akerlof & Yellen,

1990; Akerlof, 1982; Edmans, 2011; Liang, Renneboog, & Vansteenkiste, 2017).

Second, our study contributes to the role of firm-specific human capital in firms’ investment

decisions. To date, studies that investigate the labor participation on firms’ investment decisions and

their effect on protecting human capital are rare. The study most similar to this is the one by Lee, Mauer,

and Xu (2018) where they find the human capital relatedness to be a major factor in mergers and

acquisitions. They find that acquisition intensity along with acquisition performance is higher when

firms have related human capital given their role in facilitating the acquisition during the integration

process. Other papers find the effect of labor power in firms’ acquisition using the indirect role of

workers power. John, Knyazeva, and Knyazeva (2015) find that acquiring firms located in states with

more strict employment protection exhibit poorer announcement returns than those in the state with less

strict employment protection. Dessaint et al. (2017) provide empirical evidence supporting the view that

expected M&A synergy is low when strong labors are involved in the target countries. Tian and Wang

(2015) indicate that employees use unionization as a deterrent to unwanted takeover threats. Masulis et

al. (2017) find that acquiring firms with high employee stock ownership present negative M&A

announcement returns.

We believe that this study is very timely and relevant, given the constant changes in the role of

workers in firms and the current attention of both academics and policymakers on the true role of

employee representative directors in firms. This change, in our belief, make the question about the

effects of direct employee participation in firms’ decision more relevant than ever. While the majority of

the literature measure the effect of employee power through external regulatory changes (e.g.,

employment protection laws), employee ownership, or unionization, we employ the board level

representation to investigate the direct role of the employees in firms’ mergers and acquisition. We find

that labors, when directly affect firms’ decision, protect firm-specific human capital, and bring first-hand

production knowledge to the boards’ decision, thus avoid deals that have a high possibility of labor

layoffs by choosing the investment decisions more selectively.

The rest of the paper is structured as follow; Section 2 reviews related literature and develops the

hypotheses. Section 3 presents the data, Section 4 presents and discusses empirical results, and Section 5

concludes.

2. Related Literature and Hypotheses Development

While the Anglo-American system of corporate law gives management the opportunity to

nominate the board members who will then get votes from the shareholders before getting elected, the

civil law system of corporate law grants employees the right to elect their representatives as the board

member. Given their nomination and selection mechanism, these employee representative directors are

less likely to form a close tie or alliance with the incumbent manager, rather strive to protect the

employees’ benefits and welfare. Many European countries, including Germany and France among the

others, design their corporate law system in a way that gives high attention to the role of employees in

corporate decisions.

Although the role of corporate boards and their effects on the firms’ investment decisions have

been studied in the literature, there is still a limited understanding of the role of labor participation on

firms’ board of directors and its effect on firms’ value. Employees make up a major stakeholder group

that represents firms’ human capital and play an important role in firms’ operations and performance.

The extant literature shows mixed evidence on the effectiveness of

the firms’ employee-engagement strategies that mainly aim to provide better welfare to employees. A

strand of literature shows a negative effect of labor participation in corporate policy making on the

shareholder wealth by providing evidence of employees forming an alliance with the empire- building

manager or due to the lack of specialized management knowledge (Gorton & Schmid, 2004; Pagano &

Volpin, 2005; Cronqvist et al., 2009; Levine et al., 2015; Dessaint et al., 2017). However, other

researchers find that labor participation in the firms’ decisions can increase the firm value through their

specialized skill-sets (Fauver & Fuerst, 2006), better monitoring abilities (Prigge, 1998), switching the

firms’ decision from short-term to long-term, less risky investments (Mannix & Loewenstein, 1993;

Tirole, 2001; Kochan, 2003), and increasing employee satisfaction, trust, and thus productivity (Shleifer

& Summers, 1988; Edmans, 2011, 2012).

To reconcile these two distinct views on the effect of labor role in firms’ management, we

investigate the effect of employee representative directors on the firms’ acquisition pattern and outcome

using a sample of European firms. How the presence of employee representatives might affect the firms’

acquisition behavior? First, the presence of these directors on the board might affect the intensity of the

firms’ acquisition, which often results in labor restructuring. Labor restructuring has been reported in the

literature as one of the most important motives for the acquiring firms (see Gort, 1969; Jensen, 1993;

Mitchell & Mulherin, 1996; Andrade, Mitchell, & Stafford, 2001). Consistent with this evidence,

Dessaint et al. (2017) show that stronger employment protection in the target country reduces both the

volume and the synergy of the acquisitions. Maksimovic, Phillips, and Prabhala (2011) show that 19%

and 27% of acquired plants are closed or sold respectively by the acquiring firms 3 years following

acquisitions. The Empire Building Theory of Mueller (1969) cites purely selfish reasons, such as

expanding the size of the firm to increase the compensation of managers, as the main motive of the

acquirers’ management in pursuing takeovers. If these employee representatives have the same objective

functions as managers in increasing their wage and job security, we might expect that their presence on

the firms’ board is associated with more acquisitions. Masulis et al. (2017) suggest that employees when

they own large equity in firms, form an alliance with the manager and allow an empire-building

manager to engage in poor acquisitions. If employee representatives and managers have the same

intentions, they might form an alliance (e.g., Pagano & Volpin, 2005; Cronqvist et al., 2009) where the

manager awards the loyal employee directors with the higher pay and job security.

However, other evidence confirms that employee representatives care about the firms’ future

well-being. A survey conducted by the OECD5 (2017) reports that, on average, workers have 5 years or

more of tenure with their current employer. This survey is consistent with the study by Mannix and

Leoweinstein (1993) where they find that workers have a long-term horizon in their job. Despite the

shareholders’ interests in value maximization, employee representative directors are interested in

investing in the safe and long-term projects that could lower the risk of human capital loss (Kochan,

2003). Germain and Lyon-Caen (2016) suggest that the presence of employee representatives may cause

the board to shift their focus from the short-term to the long- term projects (Tirole, 2001). The evidence

of risk-averse preference of these directors is reported in the work of Faleye et al. (2006) where they

characterize the firms with these directors as those that take fewer risks, experience slower growth, and

spend less on obtaining new capital. Further and Given the sufficient evidence confirming the labor

restructuring as a major consequence of acquisitions, we anticipate the firms with the employee

representatives on the board to initiate fewer acquisitions. Following these arguments, we form our first

hypothesis as follow:

H1: The presence of employee representative affects the firms’ acquisitions intensity.

Next, we ask whether the presence of these directors in the acquiring firm is value creating or

not? The conflict of interest between employee representatives and the shareholders was first reported in

Jensen and Meckling (1979), where they characterize the employee representatives as directors who use

their position on the board to grant higher pay and other rents at the cost of shareholders. The authors

describe the presence of employee representatives as an obligation mandated by law that firms try to

find a way to discharge the limits enforced by it. Furthermore, they argue that if the presence of these

directors was in favor of the shareholders, the law must not mandate their appointee, rather firms should

appoint them voluntarily.

Although acquisitions can bring many benefits to the acquiring firms, such as cost reduction and

higher economies of scale and scope, actual returns associated with acquisitions can vary greatly. The

anecdotal evidence suggests that shareholders of acquiring firms often experience negative return in

acquisitions (Chatterjee, 1992; Haleblian, Devers, McNamara, Carpenter, & Davison, 2009; Moeller,

Schlingemann, & Stulz, 2004 and 2005). One of the main explanations for this negative return is rooted

in the high rate of unsuccessful M&A attempts that have been related to the negative reaction of

employees to these deals (Levinson, 1970; Davy, Kinicki, Kilroy, & Scheck, 1988; Schuler & Jackson,

2001; Cartwright & Schoenberg, 2006).

The likelihood of employee turnover following an acquisition can affect the employees’ morale

and productivity. The uncertainty surrounding employees regarding their future following completing an

acquisition can be a huge source of concern and stress and adversely affect employees’ well-being

(Bordia, Hobman, Jones, Gallois, & Callan, 2004). This, in turn, might cause workers to show an

irrational emotional reaction (Vakola, & Nikolaou, 2005), disrupt the firms’ operation (Shaw, Park, &

Kim, 2013), and voluntarily quit their jobs (Schweiger, & Denisi, 1991).

In reference to the corporate acquisition and its outcomes, it is hard to predict ex-ante the effects

of employee representatives on the sign of the deal’s announcement return. Gorton and Schmid (2004)

show that employee representatives when they occupy half of the boards’ seat, reduces the firm’s value

in a sample of 250 large public German firms. In their theoretical models, Miyazaki (1984) and Chang

and Mayers (1992) depict that employees may take advantage of the firm by seeking intertemporal

insurance to shield themselves from any potential restructuring, layoff, and wage adjustment due to

unforeseen financial or business shocks. Faleye et al. (2006) suggest that employees when they own a

large block of equity, use their corporate governance voice to maximize their residual claims and

contractual terms rather than shareholder value.

However, using a sample of German firms, Fauver and Fuerst (2006) find that there is an optimal

level of employee representatives (one-half of the board seats) that can increase firm value. Their results

indicate that employee representatives can provide valuable first-hand operational knowledge to the

board and they provide a strong form of monitoring that leads to less agency problem. In addition, the

results from Freeman and Lazar (1994) are consistent with the idea that having employee representatives

reduces the coordination cost by improving the exchange of information between employees and the

board. The evidence of employees holding valuable private information is not limited only to academic

literature. The fact that some of the large firms, such as Google, have created the internal predictive

system of employee collaboration to collect information from employees indicate that top executives

value the insight of employees. To conclude, the presence of employee representatives is associated with

more involvement of employees and higher employee satisfaction.

The evidence of an increase in the firms’ value following employee satisfaction has been

addressed in the literature (Eccles et al., 2014). Edmans (2011) finds that portfolio consists of the “100

Best Companies to Work for in America” has a higher long-run stock return than industry benchmarks

(see Edmans et al., 2014 for international evidence). Guiso, Sapienza, and Zingales (2015) find that

firms, where employees find managers ethical and trustworthy, outperform others. Chen, Chen, Hsu, and

Podolsk (2016) find a positive relationship between employee treatment and firms’ innovation (Flammer

& Kacperczyk, 2016).

Edmans (2011) argues that a channel through which firm intangible characteristics (such as

employee satisfaction) create value is by leading to a firm’s forthcoming tangible products that will be

observable and valued by the market. We argue that the presence of employee representatives on the

board of acquiring firms and their efforts in ensuring employees satisfaction, such as reducing the

layoffs following the acquisition, is that tangible outcome that market values in showing the higher

return for firms with these directors. In summary, we predict that employees might invest in a project

(e.g., M&A) by sharing their valuable information, increase their productivity and performance when

they feel more secure about their future contracts, and the presence of employee representatives on the

board can make facilitate this process. Following these arguments, we create the second hypothesis as

follow:

H2: The presence of employee representatives affects the acquiring firms’ value.

Following investigating the value-creation role of these directors around the deal announcement,

we look at the roles of employee representatives on protecting the firm-specific human capital following

acquisitions. As noted earlier in this paper, labor restructuring is one of the main consequences of

acquisition. We argue that preserving employees of the firm, as the most sustainable competitive

advantage asset, must be a major task of employee representatives on the board and another source of

value-creating activities by these directors. In the aftermath of a successful acquisition, employee

representatives can help firms manage their restructuring decisions aiming to increase value while

protecting employees’ jobs. This indicates that these directors can play a role in helping firms maximize

their value of firm-specific human capital while encouraging employees in investing their knowledge

and skills and assuring them that their effort will be rewarded by managers. This, in turn, may increase

the productivity and firm value in firms.

We create the last hypothesis regarding the role of employee representatives on the firms’ labor

restructuring following acquisitions as follow:

H3: The presence of employee representatives affects acquirers’ layoffs behavior following acquisitions.

3. Sample and data source

Our sample covers 15 European countries, for all of which we have board-level data, and it covers

the 2000-2014 period. For the second part of the analyses investigating the quality of acquisitions, we

form a sample of European-based acquisition that announced their deals between January 2001 and

December 2015 (the board data are merged on a prior year) by using the Thomson Reuters Securities Data

Company Mergers and Acquisitions database. We require that the acquiring firms to be publicly traded

since we only examine the announcement return of the acquiring firms.

We also impose the following sample selection restrictions: 1- The acquirer is from one of the 15

European countries in our sample, including Austria, Belgium, Denmark, Finland, France, Germany,

Ireland, Italy, Netherlands, Norway, Poland, Spain, Sweden, Switzerland, and United Kingdom. 2- We

exclude deals involving firms in the finance (SIC code 6), and utility (SIC code 49) industries since these

industries are highly regulated. Subrahmanyam, Rangan, and Rosenstein (1997) show that the directors in

regulated industries have different characteristics than those in unregulated industries. Moreover, we

exclude all the self-tendering, repurchases, spinoffs, leveraged buyouts (LBO), recapitalization deals, and

deals that their value is less than $1 million to avoid noise in the analyses (Erel, Liao, & Weisbac, 2012).

We construct other relevant data from SDC including the deal announcement date, the transaction value,

and the percentage of cash and stock that was used to fund the deal. All the control variables are winsorized

at 1% tails, and standard errors are adjusted for potential serial correlation and heteroscedasticity in our

analyses. Figure 2.1 depicts the distribution of the deals based on the sample acquiring and target

countries.

While some countries like Finland and Ireland are the main acquirer, other countries like Denmark

and Spain are the main target countries in our sample. We further obtain the firm-level control variables

from the Global Compustat, country-level economic variables from the World Bank and the International

Monetary Fund, and stock prices from WRDS. The data related to the presence of employee

representatives are taken from the BoardEx database. The main independent variable (Employee

representative) is an indicator variable equal to one if firm i in country k has employee representatives on

the board at year t, and zero otherwise. Alternatively, we use another variable (Employee representative

intensity) to measure the total number of seats that are filled by employee representative directors in a log

format. The size of the final sample is different across tests due to the availability of the essential

dependent and control variables. For instance, while the acquisition intensity analysis contains all the

observations in the sample, regardless of experiencing an acquisition or not, the analysis investigating the

announcement returns include only the observations related to acquiring firms in our sample period that

we have the deals’ announcement return available. The detailed definitions of variables are presented in

Appendix A1.

We employ some firm-level characteristics that are commonly used in the mergers and acquisition

literature. In particular, we use a log of sales (Ln Size) as a measure of the firm size. Moeller et al. (2004)

find that there is a negative relationship between an acquirer’s size and announcement returns. We use the

total debt over the total asset (Leverage), Operating cash flow and Market/book ratios as proxies for the

acquiring firms’ debt, cash flow, and growth opportunity respectively. Our last firm-level characteristics

are Ln (Number of employees) and EBIT/AT that proxy for the number of firms’ employees and firms’

profitability. The board of directors not only creates a vital corporate governance mechanism in the firms,

but also the majority of the corporate decisions, such as acquisitions, must be approved by them.

Therefore, we control for two main features of the board: size and independence. Yermack (1996) shows

a strong negative relationship between the board size and firm value, while other works documented the

positive effect of independent directors in shareholders’ value around the M&A deal announcement (e.g.,

Byrd & Hickman, 1992; Hermalin & Weisbach, 1998).

Moreover, we control for the firms’ average board tenure (Board Avg Retire) as a factor indicating

the board experience. We expect that older boards with longer tenure help firms make better acquisitions

(Cai & Sevilir, 2012). Our last sets of variables including in the intensity analysis represent the country-

level variables that could affect the bid initiation by the firms.

Those that reflect the creditor right, governance indexes (Anti-corruption and Rule of Law), countries

economic factor such as GDP and total trade (Import + export/GDP), acquirers’ country corporate income

tax rate, and lastly the employment protection regulations (EPL index) that other papers have found as

important external factors affecting the firms’ acquisition intensity (e.g., Rossi & Volpin, 2004; Erel et

al., 2012; Alimov, 2015).

For the second part of the analyses investigating the deals’ performance, we control for some of

the deal-level characteristics that have been used in the cross-country mergers and acquisitions studies.

The log of transaction values (Deal Value) represents the size of the acquisition’s deal. Stock deal, public

target, and private target are a series of indicator variables that can potentially affect the acquisition

outcome in a cross-country framework of M&A. Amihud, Lev, and Travlos. (1990) find that bidders that

fund the deals with equity experience a negative return. Regarding the type of target firms, the literature

shows that acquiring public target has a significant negative return for the acquiring firms while acquiring

private firms is associated with the positive return (Fuller, Netter, & Stegemoller, 2002).

To further control for the cross-country political and economic differences between the acquiring

and target countries, we use an extensive set of country-level economic and legal factors in both acquirer

and target countries. We use the creditor rights index, along with two of the most important governance

index namely Anti-corruption and Rule of Law to measures the level of enforcing the law in both acquiring

and target countries. We further use the common economic factors affecting the M&A including the GDP

and trade openness. Trade openness is defined as the sum of the country’s export and import deflated by

the GDP. Further, we control for the countries’ average corporate income tax rate and time-varying

measure of ruling government political ideology (left government) to capture other cross-country

motivations a firm might have in an acquisition decision. Botero, Djankov, La Porta, Lopez-de-Silanes,

and Shleifer. (2004) find that countries with left political ideology have more favorable laws towards the

employees and occasionally oppose cross-border acquisitions that might lead to employee turnover. Last

but not least, we control for the target country employment protection law (EPL) given the extant literature

showing its effects on the acquisition return (John et al., 2015; Alimov, 2015).

Table 1 presents the descriptive statistics related to all of our sample observations including those

with acquisitions. The average number of bid initiation by firms in our sample is 0.28 and the standard

deviation of 0.73 shows the justified dispersion in the sample. On average 11% of the observations have

employee representatives on their board. The average market to book ratio is 2.6, and the leverage ratio,

which equals to total debt divided by total asset, equals 0.19. Sixty-five percent of the firms have an

independent director on their board which is higher than the average firm in the U.S. that reported to have

around 53% (Paul, 2007), and the average board member is around 58 years old (average of 12 years to

retirement). The average deal value is almost $245 million with the average three-day and five-day

acquirer’s cumulative abnormal return of around 1%, consistent with the anecdotal evidence.

Table 2 shows the sample distribution based on the percentage of the firms appointing employee

representatives on the board. The sample distribution in Panel A shows that, in the last ten years of our

sample, an average employee representative director occupies 10% of the board's seats. In particular, this

number has increased from being slightly more than 6% of the boards in 2003 to more than 14% in 2014.

In panel B, we show the variation of the deals by their acquiring firms’ industries. While there is a wide

variation in firms’ industries, the consumer durables, manufacturing, and chemical products have the

highest percentages of the employee representatives among other industries with more than 50% of the

sample.

Table 3 presents the univariate analysis of the firms and deals characteristics between firms with

and without employee representatives on the board. The results indicate that firms with employee

representatives, on average, are larger and more profitable firms and have higher operating cash flow and

less growth opportunity. These results are consistent with what Faleye et al. (2006) describe the firms with

employee representatives on their board. The board characteristic differences confirm that firms with

employee representatives, on average, have larger board size, more independent directors, and younger

board age (more years to retirement). Perhaps the most important part of Table 3 is regarding the

acquisition intensity between these groups of firms. The univariate results indicate that firms with

employee representatives on the board engage in less acquisition than firms without these directors that is

consistent with our first hypothesis.

Moreover, the results in Table 3 indicate that firms with employee representatives are newer

acquirer (not a serial acquirer), engage in more diversifying deals, engage into more tender, and less

friendly deals. Shleifer and Summers (1988) describe the motives of many acquirers, especially those

serial acquirers, to be empire-building behavior due to their confidence in their special skills in bargaining.

They argue that there is no reason to believe that an acquirer has a special talent in managing acquired

firms in all different industries, but the gain that these acquirers receive is mostly due to the wealth

redistribution (often from employees) rather than value-creation. Overall, the results in Table 3 suggest

that there are some main differences in the characteristics of firms that have employee directors on the

board with other firms and that justifies our use of firm control variables.

4. Empirical Methodology and Results

4.1 Methodology

To examine the effect of an employee representative on the firms’ acquisition intensity and

performance, we employ the ordinary least squares (OLS) regressions where our dependent variables

will vary between M&A intensity and Cumulative Abnormal Return (CAR) around announcement date

(as a proxy for deals’ performance). We employ the following equations to test these relationships

empirically:

Ln (1+N of M&A) i, k, t= α i+ β1 Employee representative i, k, t-1+ γ Controls i, k, t-1+ ω i + μ t + ε k, t (1)

CAR [-1, +1]/ [-2, +2] i, k, t= α i+ β1 Employee representative i, k, t-1+ λ Controls i, k, t-1+ ω i + μ t + ε k, t (2)

In equation 1, the dependent variable is the natural log of one plus the total number of outbound

acquisitions by firm i, in country k, and at the year t. The sample used to test this equation includes all

the firm-year observation (15,709) regardless of their acquisition behavior. In other words, whether a

firm has initiated any bids in year t or not (0 deals), we use all the observation in the first equation. In

equations 2 and by running the event studies, we use the three-day and five-day Cumulative Abnormal

Return (CAR) as a proxy of deals’ short-term performance as the dependent variable. For calculating the

abnormal return, we estimate the return by implementing the market model using the acquirers’ daily

stock price and the country’s major stock return, as a proxy for the market return, from the MSCI

database. Employee representative is an indicator variable in both equations, equals 1 if a firm has

employee representatives on the board, and 0 otherwise. Alternatively, we use the number of employee

representative in the firms’ board in a log-transformed version (Employee representative intensity).

Following the literature, we employ a variety of firm, deal, and country-level characteristics that can

potentially affect the firm’s M&A intensity and performance. Moreover, in all of the specifications, we

control for the time-invariant industry, and year fixed effects.

5. Results

5.1. Employee directors’ presence and the firms’ M&A intensity

As stated by Hermalin and Weisbach (2001), the board composition and firm value are endogenous

factors and interpreting the contemporaneous relationship between these factors is a challenging task.

Furthermore, the board advisory and monitoring roles do not contribute to all corporate decisions and

policies, such as day-to-day decisions. To mitigate these challenges, we use the corporate decisions in

which boards use both their monitoring and advising roles to increase the firm’s value, and this firms’

specific policy towards M&A does not determine board composition (reverse causality). Acquiring

another company has the characteristics that we are looking for and gives us an ideal setting in which

firms make complex investment decisions that have different consequences for managers, shareholders,

and stakeholders while they are required the board’s approval before they take place.

Following our first hypothesis, we test the effects of employee representatives on the firms’

acquisition intensity. The results in Table 4 are consistent with the risk-averse characteristics of the

employee representatives, showing that firms with these directors engage in fewer acquisitions than those

without employee directors. These fewer numbers of acquisitions are both statistically significant and

economically relevant. In particular, using a sample of 15,709 firm-year observations from 2000 to 2014

in 15 European countries, we find that having employee representative is associated with 2.3% less

domestic and a 3.1% less cross-border acquisitions

(these are standardized coefficients). Moreover, the presence of these directors will reduce the dollar

amount invested in mergers and acquisition by 11%. Given the average dollar investment in acquisition,

by a firm in a given year, is $92.66, this translates into more than $10 million less investment in acquisition

per year by a firm. The last column in Table 4 provides new dimension on the role of employee

representatives on mergers and acquisition by showing that the presence of these directors on the board is

associated with 40% longer time to complete the deals. Given the average time to completion of a date to

be slightly more than a month, this translates into 15 days longer to complete a deal.

Moreover, we observe that the M&A intensity among our sample firms is positively related to firm

size, and market to book ratio. Consistent with the idea that firms with overvalued stocks take advantage

of this opportunity to engage in acquisitions. Firms with larger and younger boards in countries with higher

creditor right engage in more acquisition. However, other firm characteristics such as leverage, and a few

country-level characteristics such as GDP, trade, and employment protection index, are negatively related

to the firms’ M&A intensity. This indicated that having high leverage deterring firms to engage in more

acquisitions. Overall, our findings support the view that the presence of employee representatives in

acquiring firms shifts the investment behavior of firms to less risky behavior. These directors influence

firms in making decisions that carry the lowest possible chance of labor restructuring or employees’

layoffs.

5.2 Employee directors’ presence and acquisition performance

Next, we examine the quality of the acquisitions when employee representatives are present on the

acquiring firm’s board. If these directors are pursuing their own dreams, regardless of the employees’

future, in increasing the firms’ size to provide more benefits for themselves, we anticipate that their

presence has a deteriorating effect on the firms’ acquisition quality. Some researchers have addressed the

possible alliance between empire-building CEOs and employees following the increase in employee

power in firms (e.g., Pagano & Volpin, 2005; Cronqvist et al., 2009), and others show empirically that

this alliance will lead to acquisition with negative return (Masulis et al., 2017). In other words, if the

presence of these directors on the board, not only alleviate the stress and anxiety of the employees

regarding the potential turnover but also, gives the empire-building manager the opportunity to expand

the firms’ size based on her own desire we expect to see a negative return associated with these deals.

On the other hand, if these directors increase the trust and satisfaction in employees that lead to

higher productivity, we expect that their presence to be associated with the higher firm value (Edmans,

2011; Edmans et al., 2014). The presence of these directors can significantly increase the morale and job

satisfaction in employees amid the acquisition process and decrease the stress of turnover in them which

in turn can translate into better job performance and higher return. Using a sample of 2,972 acquisitions

announced return during 2001-2015, we find that the acquiring firms with employee representatives on

their board experience significantly higher abnormal stock return on their announcement. We use both

three-day and five-day cumulative abnormal returns (CAR) as proxies for deals performance. After

controlling for a variety of firm, deal, and country characteristics, the results in Table 5 indicate 1.07 and

1.13% higher three and five-day abnormal return, respectively, for firms with employee representative

than those without these directors on the board. These results indicate sizable effects, equivalent to the

three-day return of 107 basis point, and the five-day return of 113 basis point for acquiring firms with

employee representatives. These results are consistent with the view that the presence of employee

representatives on the board is associated with a higher level of firms’ performance coming from the

employees’ satisfaction, commitment, and productivity. This, in turn, is acknowledged by the market (and

investors), as firms that treating its human capital better might have a higher value (Edmans, 2011).

5.3 Sample selection and identification concerns

One potential problem with our results might arise from the idea that initiating the mergers and

acquisition is not a random decision (Li & Prabhala, 2007). Regarding the results in Table 5, we only have

the return data for the firms that decided to initiate an acquisition, and this decision might be due to the

managers’ outlooks about market reaction to the announcement. Therefore, the results that we have might

be prone to self-selection issue. In order to address this issue, we use the Heckman (1976, 1979) two-step

correction model and present the results in the last two columns of Table 2.5. In the first step, we run a

probit model (Table A2) in order to estimate the probability of a firm engaging in an acquisition, then

using the estimated coefficient in the probit model, we calculate the inverse Mill’s ratio. In the second

step, we use Mill’s ratio as part of our control variables in some of the regressions. The results on the last

two columns of Table 5 confirm our previous findings, showing the positive and significant effects of

employee representatives on the firms’ acquisition performance.

Another issue related to the empirical findings might arise from the possibility of revere causality

issue. In particular, one might argue that the positive effect of employee representatives on the firms’

acquisition announcement return is due to the selection bias issue. For instance, firms might assign the

employee representatives on the board when they see a good acquisition opportunity to bring along the

employees in this important decision while improving the performance and productivity of the firm prior

to the acquisition. To address this issue, we remove the deals that are more subject to this endogeneity

issue. We eliminate the deals where employee directors are appointed within 3 years leading to the deal

announcement date. In an unreported Table, we find that the coefficients of Employee representative

remain positive and statistically significant. Overall, these robustness tests suggest that the positive effects

of employee representatives on firms’ acquisition performance are not due to the selection bias or reverse

causality issue.

5.4 When are the employee directors most valuable?

Next, we compare the size of the effects that we find so far across different types of deals in order

to provide additional evidence that the results are robust to the endogenous director selection concern, as

well as to shed lights on the mechanisms through which employee directors add value to firms. As argued,

the presence of employee representatives is associated with deals that create value for shareholders by

bringing more trust and satisfaction in employees, and this, in turn, translates into better performance and

value for firms. Following this argument, we expect to see the more pronounced effect of these directors

on the deals when the firm-specific human capital has higher importance for the firms and the satisfaction

and productivity of employees can bring more value during the acquisition process. In particular, we look

at the deals that are larger, the acquiring firms are in the high-coordination and high labor-intensity

industries where the flow of information from the board to the employee and the role of employees in

firms are more important, and the countries with weaker legal provisions protecting firms’ human capital.

Given these arguments, we divide our sample into deals with large and small value based on the

median deal value in the U.S. dollar. If the presence of employee representatives on the acquiring firms’

board alleviate the concern in employees regarding their contract, reducing their stress during the

acquisition process, and increase their productivity by informing them about the acquisition process, we

expect to see the more pronounced effect on deals that are larger in values. Given the possibility that larger

deals might have a higher chance of major firms’ restructuring following the completion of the deal. The

results in columns 1 of Table 6 indicate that the presence of employee representatives in the acquiring

firms engaging in the larger deal is more pronounced with 1.2% higher return (120 bp). This result

suggests that the presence of these directors is more effective when the deal is economically more

significant.

Columns 2 of Table 6 present the effects of employee representatives on the firms’ acquisition

return in different industries. Fauver and Fuerst (2006) find the effects of employee directors to be more

important in industries that require intense coordination or more-skilled workers. They suggest that in

these industries, the flow of information from employees to the board is more valuable. Following the

management literature, they find that these high coordination industries require more extensive supply

chain management practices. We define the high coordination industries, following Fauver and Fuerst

(2006), as Trade industry with SIC equals 50-59, Transportation industry with SIC code equals 40-49, and

manufacturing industry with SIC code equals 28-29 and 33-39. We expect to see more pronounced effects

of employee representatives in these industries because the transfer of information from the employee to

the board is more vital and these directors can inform the core part of the production regarding the

acquisition, thereby ring more trust and satisfaction among them. Consistent with this prediction, our

results in columns 2 of Table 6 reveal that the presence of employee representatives in high coordination

industries is associated with a 1% higher announcement return.

Similarly, we divide the sample into those with acquirers belong to high labor cost industries and

low labor cost industries. Following the literature (e.g., John et al., 2015), we define high labor cost

industries as those with average workers’ compensation higher than other industries in an acquiring firm.

Since in these industries the value of firms’ human capital is even more important, we expect that the

presence of employee representatives in these industries create more value. Consistent with this

expectation, the presence of employee representatives in industries with high labor cost is associated with

deal return of 1.7% (170 bp) higher than industries with lower labor cost.

Next, we study the effect of employee representatives in countries with weaker legal provisions

supporting employees’ rights. We argue that the presence of these directors in supporting firm-specific

human capital is more prevalent in countries where the current legal provisions supporting the employees

are weaker. For this purpose, we use the country-level union score constructed by the World Bank as a

proxy for human capital protection. We divide the sample countries into those with high and low union

score, using the median value. Consistent with our expectation, the results in the last column of Table 6

confirm that the presence of employee representatives on the board creates more value in countries with

weaker union power supporting employees. In particular, the presence of these directors in those countries

1.5% (150 bp) higher announcement return that those with stronger union power. Overall, our results in

Table 6 suggest that employee representatives on the board use their expertise, valuable private

information, employee assuring skills and abilities in order to help firms achieve better acquisitions.

Moreover, these directors significantly reduce employees’ stress during acquisition and their presence

increase employees’ performance and commitment level which is necessary for facilitating deals.

Further, we investigate the acquiring firms’ post-merger productivity changes in Table 7,

controlling for all the variables in Table 6. If these employee directors are leaning towards the investment

decisions that have a higher return in the long-term while protecting the firms’ human capital, we expect

that their presence to be associated with the higher long-term performance as well as short-term

performance. We define the post-merger changes in acquiring firms’ performance as an 8-year (from 4

years prior to acquisition to 4 years following the acquisition) change in the acquiring firms’ industry-

adjusted return on asset (ROA). The results in Table 7 show that acquiring firms with these directors on

the board experience 5% higher post- merger performance following the acquisitions. This result confirms

the evidence that deals in which acquiring firms have employee representatives on the board are more

profitable.

5.5 Employee representatives and post-merger restructuring

Our results so far indicate that the presence of employee representatives is associated with specific

patterns and outcomes in the firm's acquisition behavior. In particular, we have shown that these directors

lead firms in engaging in fewer acquisitions (both domestic and cross-border), while those deals that they

do engage in have positive return around the announcement date and positive long-run accounting

performance.

In this section, we investigate the role of these directors in protecting firms’ human capital

following completing an acquisition. As noted, employees are firm-specific human capital that firms spend

so many resources to train them. Terminating employees’ contracts, following an acquisition, means that

firms waste their investment in human capital without fully receive the return on investments from them.

We argue that given the evidence showing layoff as one of the consequences of merger and acquisitions,

the presence of employee representatives should change this dynamic towards preserving the firms’

human capital. Consistent with this view, the results in Table 8 confirm that the presence of employee

representatives is associated with less probability of layoffs two-year post-merger. In particular, compared

to acquiring firms without employee representatives, those with these directors have 30% less probability

of layoffs two- year post-merger.

This result is more prevalent in industries where the flow of information between board and

employees is more important (High-coordination industries), and when the firm has higher skilled

employees with a higher cost of termination (High Labor cost industry). Also, these industries have more

high-skilled employees that are more valuable firm-specific human capital for firms. Overall, our results

in Table 8 confirm the role of employee representatives in creating value for firms, not only by helping

them to make a better acquisition but by protecting firms’ human capital, as firms’ competitive advantage,

following the acquisitions.

This paper contributes to the literature by providing new insights into the importance of labor

participation in firms’ investment policy amid the possibility of layoff around those investments. While

the majority of the literature investigates the role of labor in firms’ decisions

by focusing on their indirect influence, such as industry-level unionization or employee stock ownership,

we capture the direct effect of employee representatives on the firms’ managerial decision. This paper is

also an addition to the strategic management research that emphasizes the importance of relevant

information and knowledge to superior acquisition outcomes (Kroll, Walters, & Wright, 2008; McDonald,

Westphal, & Graebner, 2008), and to the literature emphasizing on the role of firm-specific human capital

in firms’ investment decision (Rajan & Zingales, 1998). We expand upon the previous literature by

investigating the effects of employee representative directors in protecting firm-specific human capital

and their value-creating roles in the firms’ major decision. This value creation happens not only by

achieving better quality acquisitions but also by protecting firms’ human capital following those deals.

5. Conclusion

Using a sample of firms in 15 European countries between 2000 and 2014, we investigate how the

presence of employee representatives on the acquiring firms’ board will affect their acquisition intensity

and outcome. Our results indicate that compared to firms with no employee representatives, those that

have these directors on the board initiate fewer acquisitions while, on average, make better acquisitions.

On average, firms with employee directors initiate 2.3% and 3.1% fewer domestic and cross-border

acquisitions. Moreover, deals with employee representatives’ presence on the acquirer’s board show

1.07% and 1.13% higher three-day and five-day announcement returns, respectively. This positive

wealth effect of these directors for the acquiring firms is more pronounced when the deal is more

economically significant, acquiring firm is in high-coordination and high labor-intensity industries, and

in countries with less legal provisions protecting employees. By using the major layoff two years

following acquisitions as

the potential adverse outcome of the deals for firms’ human capital, we investigate the role of employee

representatives on the firms’ restructuring behavior following the acquisitions. Our results confirm the

role of employee representatives in protecting firms’ human capital following the acquisition by

reducing the probability of layoffs by more than 30%. These results confirm that employee

representative directors, while seeking the firms’ human capital welfare, indirectly create value for

shareholders and increase firm value.

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Figure 1

This figure shows the distribution (percentage point) of the total bidder and target firms in our sample based on their countries.

0%10%20%30%40%50%60%70%80%90%

100%

Distribution of Bidder and Target Countries

% of Bidders % of Targets

Figure 2

This figure plots the distribution of the distribution of employee directors in different industries for both firms with the employee on the board and those firms without employee on the board.

0.000 5.000 10.000 15.000 20.000 25.000 30.000 35.000

CONSUMER NONDURABLES

CONSUMER DURABLES

MANUFACTURING

OIL, GAS AND COAL

CHEMICAL PRODUCTS

BUSINESS EQUIPMENT

TELEPHONEANDTELEVISION

UTILITIES

WHOLESALE ANDRETAIL

HEALTH CARE

OTHER

Employee representative in acquiring firms in different industries

No Employee Director Employee Director Total Sample

Appendix 1

Definitions of Variables Variable Definition Source Acquisition # Total number of domestic bid initiation by firm/year SDC Ln(1+Acquisitio Natural log of the number of domestic bid initiation SDC Cross-Border A Total number of cross-border bid initiation by firm/year SDC Ln (1+cross-bor Acq #) Natural log of the number of Cross-border bid initiation SDC

CAR[-1,+1] Three-day cumulative abnormal return centered on the acquisition announcement date calculated using the market model SDC

CAR[-2,+2] Five-day cumulative abnormal return centered on the acquisition announcement date i calculated using the market model SDC

Ln(1+Deal dura Natural log of days between the announcement date and completion date SDC Deal Value The dollar deal value as reported by SDC SDC Ln (Deal Value) The log of deal value as reported by SDC SDC Private Target Indicator variable equals one if the target is a private company. SDC Public Target Indicator variable equals one if the target is a public company. SDC BLER intensity Natural log of 1 plus the number of BLER. BoardEx BLER Indicator variable equals 1 if a firm has a BLER on the board and 0 otherwise. BoardEx Ln (Number of employees) Natural log of the number of firm employee BoardEx

Ln (Board Size) Natural log of the number of directors on the firm's board. BoardEx Independent Bo Indicator variable equals one if over 60% of directors are independent. BoardEx

Board Avg Reti Average year to Retirement for the board at a selected Annual Report Date assuming a retirement age of 70 BoardEx

Pay Ratio CEO Compensation scaled by Average Employee Compensation BoardEx

CEO Duality Indicator variable equals one if the CEO and the chairman are the same person and 0 otherwise. BoardEx

Ln (Size) The log of the firm's net sales. Compustat EBIT/AT Operating income before interest and taxes scaled by book value of total assets (AT). Compustat Leverage (Long-term debt + Debt in current liabilities) / Total assets Compustat Market/Book (Total assets-Book equity + Market value of equity) / Total assets. Compustat Operating cash The total amount of operating cash flow Compustat

Creditor right in An index aggregating country's creditor rights ranging from 0 (week) to 4 (strong). Djankov et 2007

Governance ind Anti-corruption

Control of corruption captures perceptions of the extent to which public power is exerc for private gain ranges from -2.5 to +2.5 WDI

Governance ind Rule of law

Reflects perceptions of the extent to which agents have confidence in and abide by the of society, and in particular the quality of contract enforcement WDI

Ln (GDP curren GDP at purchaser's prices is the sum of gross value added by all resident producers in economy plus any product taxes and minus any subsidies not included in the value of t products

WDI

Ln (Import + export/GDP)

Trade is the sum of exports and imports of goods and services measured as a share of t gross domestic product. WDI

The corporate in tax rate Taxes on corporate income, profit, and capital gains World Bank

EPL index A summary indicator of sub-indicators measuring the stringency of regulations govern hiring and firing of workers on regular and temporary contracts, and regulations apply collective dismissals.

OECD

Left governmen Indicator variable equals one if the country has a government with left political ideolo 0 otherwise. World Bank

Civil Acquirer d Indicator variable equals 1 if the acquirer country has Civil law origin and 0 otherwise Djankov et 2007

Cross-border acquisitions Indicator variable equals one if both bidder and target countries are different and 0 oth Author's

calculation

Layoff Indicator variable equals 1 if the acquirer firm reduce the number of employment by 2 the two years following the acquisition

Author's calculation

Average Wage Reduction

Indicator variable equals 1 if the acquirer firm reduce the amount of average wage by the two years following the acquisition

Author's calculation

Inverse Mills Ra Self-selection variable from the probit model predicting the probability of merger in y Author's calculation

High-coordinati industry

Define as industries that the role of private information of employees is more importan firms’ investment decisions.

Fauver and 2006

government effe Government Effectiveness captures perceptions of the quality of public services, the c service and the degree of its independence from political pressures, and policy implementation

World Bank

Union The proportion of employed, adult respondents who report confidence in the country's union WDI

Appendix 2 European Regulations on Employee Representation

Within Scandinavian firms, workers have the opportunity to establish BLER (board-level

employee representation). BLER rights have been in place since the seventies, and the presence of employee directors on the boards of firms is the result of firm employees demanding the introduction of BLER. Workers’ representation in Scandinavian firms is limited to a non-majority share, as required by law. This contrasts with Germany, where employee directors can hold up to half of the board seats. Because of these differences in policies, Scandinavian employee directors should be less inclined to resist cost cuts and more inclined to negotiate with the firms’ management.

During the Great Recession, Scandinavian companies faced a substantial decline in consumer demand. This was the case with many other European firms (e.g. Gross and Acidi, 2010; European Commission, 2009); for instance, in. Sweden and Denmark, the demand for manufacturing fell by 20 percent during 2008-2009, often resulting in substantial reductions in labor costs (Svalund et al., 2013). Many Scandinavian companies also responded with work-force cuts, yet others responded with novel integrative solutions (Svalund et al., 2013). Although the latter response is less likely in systems with collective bargaining (Aidt and Tzannatos, 2002), just as is the case in Scandinavia, its success is owed to the local actors who reportedly operated with substantial leeway in order to arrive at the most efficient solutions (Svalund et al., 2013).

In Scandinavia, when the employees of a firm reach a certain size (minimum 35 full-time employees in Denmark, 30 in Norway and 25 in Sweden), they are given the option to appoint employee representation on the board of directors. This requires the employees to propose and support such representation. In Denmark, employee representation can be proposed by 10% of the employees or the equivalent of a trade union representing this percentage, and if supported by the majority of the employees in the firm, this option is then established. Since the late seventies, the rights to be represented on the board of directors have been in place, and consequently, many firms have had such a representation in place for decades. The employees of the firm elect the representatives on the board, who normally run for a four-year term, and their employment must be by the same company or business group. Employee directors never make up a majority on the board, generally holding about a third of board seats Employee directors play an important role in firms’ strategic decisions because they hold the same rights and obligations as shareholder-elected members of the (Hansen, 2003).

Jackson, 2005 classifies the level of codetermination among 22 OECD countries. In general, there are 14 countries with no substantial codetermination, and 8 other countries, mainly the English-speaking countries, that do not implement any legal provision for co-determination. Some other countries like Italy and Portugal, although passed in their constitutions to recognize workers voice in firm’s managerial decisions, do not have any important codetermination legislations as well. Some other countries have a limited level of employee representation in state owned and public service sectors such as public transportation and universities. The examples of those countries are Spain, Greece, Ireland, and Belgium. Jackson, 2005 classifies all these countries as those with negative cases of codetermination. The rest of the countries that are presented as positive codetermination countries (those with a Fuzzy score more than 0.5 in Table 1) that have a board-level representation right are Austria, Denmark, Finland, France, Germany, Netherlands, Norway, and Sweden.

Compare to other countries with positive codeterminations, France has the lowest level of employee representation. In the public sector, the codetermination right passed in 1983 and allows the elected members to fill up to one-third of the board seats. The French law allows two to four (depending on the number of managers and engineers) work council representatives to participate in the private firms’

board meeting since 1982. However, these laws are not considered the strong version of codetermination right. As stated in Goetschy 1983; Goyer/Hancke 2005, French unions have shown a slight interest in the board-level representation.

Compared to France, employee representation in the Netherlands is stronger since the development of the “structure law” allowed works councils to gain the right to nominate members for election to the supervisory board of Dutch firms. In this system, known as “controlled co-optation,” (van het Kaar 2004) shareholders can still oppose appointments of particular persons, causing this right, to be considered weaker than some other systems of representation. As recent as the mid-1990s, few companies made use of their right to nominate representatives, although this trend is reversing more recently. Even though Dutch unions initially supported the original legislation in 1971, they considered the legal framework to be weak and ineffective. As a result, the unions did not actively encourage the use of these rights by works councils. Companies that have more than 100 employees, enough capital and a work council must set up a supervisory board. There is no fixed rate for the presence of the employee on the board.

The Finnish system also allows for considerable room for negotiation with employers regarding how many BLERs will be elected and to what boards (e.g. supervisory or management) (Hans-Boeckler Foundation/ European Trade Union Institute 2004). The structure of this law, characterized by negotiation, means that board-level representation remains only moderately developed. Although initial legislation emerged in 1979, this served as the foundation for a more elaborate system that was established in 1990. Finnish law allows companies with more than 150 employees to have a member on the board. While the number of representatives might vary between one and four, the whole proportion of the employee elected board should not go further than one-fifth of the board.

The final groups of countries that have strong employee representation include Austria, Denmark, Germany, Norway, and Sweden. Within this group, the Austrian and Scandinavian systems are generally considered somewhat weaker, wherein the case of two-tier boards, representation generally constitutes one-third of supervisory board members. Swedish system allows companies with more than 25 employees to have two board members. If the number of employees increases to more than 1,000 and the firm engages in at least two types of businesses, the employee elected representatives can reach to 3 members. However, similar to many other countries, the BLERs cannot form a majority. In Denmark, firms with more than 50 employees can choose two or up to one-third of the board members. Firms with more than 40 employees in Austria can have up to one-third of the board member elected by the work council. In Norway, while the majority of firms in private sectors are regulated to have up to one-third of their board chosen from the BLERs, this proportion is not as much in the public sector.

Germany’s system of codetermination, on the other hand, is widely considered the strongest and most extensive in the world (Streeck 1992) due to the unique characteristics of the ‘parity’ representation in firms with over 2,000 employees. Under this system, the supervisory board seats are held by 50% of labor representatives. Additional powers are held the iron or coal or steel sectors. For example, when faced with a tiebreaker, the pivotal vote held by the chair of the board, rather than going to a representative of the shareholders, goes to a neutral person. In addition, employees also elect a director to the management board who is responsible for personnel affairs. However, a detailed comparison and assessment of the relative strengths and weaknesses of these systems are beyond the scope of this paper. Here the concern is for their broad similarities among countries with relatively well-established systems of board-level employee representation.

Table 1 Descriptive Statistics N Mean Median Min Max sd Acquisition # 15,709 0.28 0.00 0.00 16.00 0.74 Ln (1+Acquisition #) 15,709 0.16 0.00 0.00 2.83 0.36 Cross-Border Acq # 15,709 0.16 0.00 0.00 12.00 0.52 Ln (1+cross-border Acq #) 15,709 0.09 0.00 0.00 2.56 0.28 Deal Dollar volume per year 15,709 92.66 0.00 0.00 60243.38 1009.97 Ln (Dollar value per year) 15,709 0.77 0.00 0.00 11.01 1.79 Emp-Rep intensity 15,709 0.16 0.00 0.00 2.48 0.46 Emp-Rep 15,709 0.11 0.00 0.00 1.00 0.31 Ln (Size) 15,709 5.82 6.04 0.00 11.05 2.56 ROA 15,709 0.03 0.06 -1.06 0.33 0.19 Leverage 15,709 0.19 0.17 0.00 0.86 0.17 Market/Book 15,709 2.66 1.84 -5.46 21.93 3.50 Operating cash flow 15,709 0.05 0.07 -0.86 0.34 0.16 Ln (Number of employees) 15,709 7.28 7.41 1.61 11.99 2.38 Board Avg Retire 15,709 12.54 12.40 2.10 23.90 4.30 Ln (Board Size) 15,709 2.03 1.95 1.10 3.14 0.40 Independent Board 15,709 0.65 0.64 0.00 1.00 0.20 Creditor right index 15,709 2.92 4.00 0.00 4.00 1.45 Governance index- Anti-corruption 15,709 1.74 1.72 0.00 2.35 0.38 Governance index- Rule of law 15,709 1.65 1.67 0.36 1.99 0.26 Ln (GDP current $US) 15,709 28.23 28.56 25.66 28.99 0.71 Ln (Import + Export/GDP) 15,709 4.16 4.07 3.82 5.10 0.28 Country Corporate Income Tax rate 15,709 15.53 14.19 5.42 42.26 6.30 EPL index 15,709 1.76 1.26 1.10 2.88 0.63 CAR [-1,+1] 2,972 0.01 0.01 -0.37 0.90 0.06 CAR [-2,+2] 2,972 0.01 0.01 -0.47 0.99 0.07 Deal Duration 2,657 39.91 0.00 0.00 1366.00 88.40 Ln (Deal Duration) 2,657 1.84 0.00 0.00 7.22 2.10 Ln (Size) 2,972 6.60 6.71 0.19 11.05 2.26 ROA 2,972 0.07 0.08 -0.50 0.31 0.11 Leverage 2,972 0.19 0.17 0.00 0.76 0.15 Market/Book 2,972 2.97 2.16 -5.46 20.85 3.49 Operating cash flow 2,972 0.09 0.09 -0.43 0.32 0.10 Ln (Number of employees) 2,972 8.10 8.23 2.64 11.99 2.17 Board Avg Retire 2,972 12.68 12.31 -2.95 29.14 4.01 Ln (Board Size) 2,972 2.11 2.08 1.10 3.50 0.37 Independent Board 2,972 0.64 0.63 0.00 1.00 0.18 Deal Value 2,972 245.70 25.52 1.27 5627.97 767.53 Ln (Deal Value) 2,972 3.52 3.24 0.24 8.64 1.88 Stock Deal 2,972 0.04 0.00 0.00 1.00 0.19 Public target 2,972 0.10 0.00 0.00 1.00 0.30 Private target 2,972 0.56 1.00 0.00 1.00 0.50 Creditor right index A 2,972 3.18 4.00 0.00 4.00 1.35 Governance index- Anti-corruption A 2,972 1.81 1.79 0.08 2.41 0.33 Governance index- Rule of law A 2,972 1.66 1.67 0.38 1.99 0.21 GDP A 2,972 28.23 28.51 26.13 28.91 0.65 Import + Export/GDP A 2,972 4.11 4.02 3.82 5.10 0.24 Corporate income tax rate A 2,972 15.50 13.92 5.42 44.71 6.42 Left government A 2,972 0.59 1.00 0.00 1.00 0.49 Creditor right index T 2,972 2.67 3.00 0.00 4.00 1.42 Governance index- Anti-corruption T 2,972 1.72 1.73 -0.04 2.41 0.38 Governance index- Rule of law T 2,972 1.63 1.64 0.35 1.97 0.23 GDP T 2,972 28.62 28.53 26.11 30.39 1.05 Import + Export/GDP T 2,972 3.96 4.00 3.03 5.10 0.41 Corporate income tax rate T 2,972 16.09 14.53 5.43 42.50 6.40 Left government T 2,972 0.53 1.00 0.00 1.00 0.50 EPL index T 2,972 1.41 1.26 0.26 4.58 0.81 Union Rate A 2,910 29.92 28.20 7.60 76.50 14.81 Union Rate T 2,910 26.28 26.60 7.60 76.50 15.00

This table presents summary statistics of our main variables in the analysis. The total sample contains 15,709 firm-year observations while there are 2,972 M&A observations covering the period from 2000 to 2014. The M&A deals are from Thomson Reuters SDC. To include in the sample, the acquirer country must be located in one of the 15 European countries for which we have available board information from BoardEx. We trim all the continuous variables at the 1% level in each tail. We define all the variables in Table A1 in the Appendix.

Table 2 Sample Distribution by Year and Industry Panel A: Distribution of observations by year Year Number of firms Firms with Emp-Rep (%) 2000 44 4.55 2001 311 1.93 2002 554 4.15 2003 766 6.40 2004 977 11.16 2005 1,074 10.71 2006 1,201 11.16 2007 1,301 11.99 2008 1,295 11.51 2009 1277 11.35 2010 1,315 11.25 2011 1,397 12.60 2012 1,410 12.48 2013 1,414 11.67 2014 1,373 14.64 Total 15,709 11.17 Panel B: Distribution of observations by industry Fama and French industry Number of firms Firms with Emp-Rep (%) Consumer Non-Durables 1,379 9.35 Consumer Durables 546 28.57 Manufacturing 2,198 18.74 Oil, gas, and coal 644 6.37 Chemical products 509 18.27 Business Equipment 2,709 10.96 Telephone and television 621 14.17 Wholesale and retail 1,703 4.58 Health care 1,025 10.54 Other 4,375 8.05 Total 15,709 11.17

This table reports the distribution of all our observation based on the year and industry. Panel A depicts the sample distribution in different years and the portion of the sample belong to the firm with employee representatives. Panel B shows this observation based on the Fama-French 12 industry classification.

Table 3 Univariate Analysis Emp-Rep=1 (315) Emp-Rep=0 (2,657) t-statistics Acquirers’ Characteristics Ln (Size) 8.17 6.49 -13.12*** ROA 0.08 0.07 -2.08** Leverage 0.2 0.19 -1.16 Market/Book 2.59 3.01 2.04** Ln (Board Size) 2.48 2.06 -20.97*** Independent Board 0.88 0.61 -27.77*** Board Avg Retire 14.63 12.44 -9.27*** Operating cash flow 0.09 0.08 -2.83*** Deal Characteristics Acquisition # 1.83 2.23 3.68*** Ln (Deal Duration) 3.05 1.7 -10.35*** Serial acquirer 0.61 0.68 2.81*** Business overlap 0.08 0.17 4.16*** Tender deal 0.09 0.05 -3.19*** Friendly deal 0.95 0.97 2.25*** % Cash Deal 43.9 56.32 4.71*** % Stock Deal 6.42 7.91 1.11 Same religion 0.83 0.82 -0.52 Same language 0.356 0.731 14.14***

This table presents the univariate analysis between the firms with and without employee representatives. t-values for differences between means are reported in the last column.

Table 4 Employee representatives and acquirers’ M&A activity

(1) (2) (3) (4) (5) (6) Domestic Deals Cross-border Deals Deal Value

Emp-Rep -0.027** -0.028*** -0.117*

(-2.36) (-2.80) (-1.76) Emp-Rep intensity -0.025*** -0.026*** -0.090*

(-3.20) (-3.73) (-1.84) Firm and Board Characteristics Ln (Size) 0.010*** 0.010*** 0.007*** 0.007*** 0.120*** 0.120***

-3.02 -3 -2.63 -2.59 -6.67 -6.66 ROA 0.050* 0.049* 0.035* 0.034* 0.163 0.159

-1.91 -1.86 -1.82 -1.76 -1.49 -1.45 Leverage -0.067*** -0.068*** -0.050*** -0.051*** -0.385*** -0.387***

(-4.00) (-4.05) (-4.07) (-4.13) (-4.75) (-4.78) Market/Book 0.002** 0.002** 0.002*** 0.002*** 0.015*** 0.015***

-2.55 -2.51 -3.99 -3.93 -3.83 -3.81 Operating cash flow 0.011 0.011 -0.028 -0.027 -0.159 -0.157

-0.36 -0.38 (-1.28) (-1.26) (-1.24) (-1.22) Ln (Number of employees) 0.023*** 0.023*** 0.021*** 0.021*** 0.095*** 0.095***

-6.32 -6.35 -7.67 -7.71 -5.3 -5.32 Board Avg Retire 0.002*** 0.002*** 0.001 0.001 0.007** 0.007**

-2.97 -3.06 -1.39 -1.49 -2.1 -2.11 Ln (Board Size) 0.033*** 0.037*** 0.029*** 0.032*** 0.199*** 0.207***

-3.44 -3.76 -3.9 -4.33 -4.03 -4.16 Independent Board -0.008 -0.007 0.022 0.023 0.156* 0.156*

(-0.45) (-0.40) -1.59 -1.64 -1.78 -1.78 Country Characteristics Creditor right index 0.013*** 0.014*** 0.006** 0.006** 0.026 0.029

-4.54 -4.86 -2.2 -2.57 -1.47 -1.6 Governance index- Anti-corruption 0.008 0.008 -0.032* -0.032* -0.076 -0.076

-0.33 -0.33 (-1.66) (-1.66) (-0.62) (-0.62) Governance index- Rule of law 0.024 0.029 0.078*** 0.083*** 0.253 0.26

-0.76 -0.93 -2.89 -3.08 -1.46 -1.51 Ln (GDP current $US) -0.035*** -0.035*** -0.027*** -0.026*** -0.083** -0.079**

(-5.20) (-5.16) (-4.54) (-4.48) (-2.17) (-2.09) Ln (Import + Export / GDP) -0.105*** -0.104*** -0.039*** -0.039*** -0.294*** -0.287***

(-6.08) (-6.05) (-2.62) (-2.58) (-2.81) (-2.75) EPL index -0.040*** -0.037*** -0.016** -0.013* -0.201*** -0.195***

(-4.98) (-4.57) (-2.21) (-1.74) (-4.12) (-4.05) Corporate income tax rate 0.00 0.00 -0.001 -0.001 0.003 0.003

(-0.05) (-0.32) (-0.91) (-1.21) -0.75 -0.67 Constant 1.337*** 1.298*** 0.661*** 0.620*** 2.609* 2.432*

-5.53 -5.37 -3.26 -3.06 -1.94 -1.81 Observations 15,707 15,707 15,707 15,707 15,707 15,707 Control Variable as Table 2.5 NO NO NO NO NO NO Year FE YES YES YES YES YES YES Industry FE YES YES YES YES YES YES Adj. R-squared 0.09 0.09 0.08 0.08 0.1 0.1

This table reports results of ordinary least squares (OLS) regressions of the acquirers’ M&A activity on the indicator variable equal 1 if the firm has employee representatives on the board and, 0 otherwise. The sample contains 15,707 firm-year observation from 2000 to 2014 for 15 European companies. The dependent variable in column 1 to 4 is the natural log of the total number of outbound M&A (and cross-border M&A) by acquirers’ country in year t. The dependent variable in column 5 and 6 equal to the total dollar value of the deals initiated by the firm in a given year. The

dependent variable in the last two columns equal to the difference between the announcement and effective date which proxy for time to completion for deals. We use the sample and control variable consistent with Table 5 for the last two columns. We lag all the control variables by 1 year before the announcement year. All regressions control for industry and year fixed effects, and we cluster the standard errors at the firm level. We suppress the coefficients related to fixed effects for brevity and report the robust t-statistics in brackets.

Table 5 OLS Heckman Correction

CAR [-1,+1] CAR [-2,+2] CAR [-1,+1] Emp-Rep 0.011** 0.011** 0.011**

(2.41) (2.35) (2.40) Emp-Rep intensity 0.007** 0.007** 0.007**

(2.26) (2.11) (2.25) Firm and Board Characteristics Ln (Size) -0.001 -0.001 -0.002 -0.002 -0.001 -0.001

(-0.26) (-0.30) (-0.72) (-0.76) (-0.28) (-0.32) ROA -0.049 -0.048 -0.021 -0.020 -0.050 -0.049

(-1.49) (-1.47) (-0.61) (-0.58) (-1.52) (-1.51) Leverage 0.034** 0.034** 0.034** 0.034** 0.034** 0.034**

(2.19) (2.18) (2.03) (2.02) (2.35) (2.35) Market/Book 0.000 0.000 -0.000 -0.000 0.000 0.000

(0.29) (0.28) (-0.00) (-0.01) (0.29) (0.28) Operating cash flow 0.033 0.032 0.014 0.014 0.032 0.032

(0.89) (0.88) (0.38) (0.36) (0.89) (0.88) Ln (Number of Employee) -0.003 -0.003 -0.001 -0.001 -0.003 -0.003

(-1.20) (-1.17) (-0.51) (-0.47) (-1.21) (-1.18) Board Avg Retire -0.001 -0.001 -0.001 -0.001 -0.001 -0.001

(-1.56) (-1.54) (-1.53) (-1.49) (-1.56) (-1.54) Ln (Board Size) -0.013** -0.013** -0.016** -0.016** -0.013** -0.013**

(-2.26) (-2.24) (-2.51) (-2.45) (-2.32) (-2.30) Independent Board -0.012 -0.012 -0.007 -0.007 -0.012 -0.012

(-0.85) (-0.84) (-0.47) (-0.45) (-0.84) (-0.84) Deal Characteristics Ln (Deal Value) 0.003*** 0.003*** 0.002** 0.002** 0.003*** 0.003***

(3.30) (3.28) (2.53) (2.51) (3.30) (3.28) Stock Deal 0.020 0.020 0.022 0.022 0.020 0.020

(1.59) (1.59) (1.62) (1.62) (1.59) (1.59) Public Target -0.023*** -0.023*** -0.027*** -0.027*** -0.023*** -0.023***

(-5.17) (-5.14) (-5.56) (-5.53) (-5.16) (-5.14) Private target -0.003 -0.003 -0.004 -0.004 -0.003 -0.003

(-0.97) (-0.95) (-1.40) (-1.38) (-0.98) (-0.96) Country Characteristics Creditor right index A -0.001 -0.001 0.001 0.000 -0.001 -0.001

(-0.40) (-0.57) (0.35) (0.19) (-0.45) (-0.61) Governance index- Rule of law A 0.008 0.008 0.001 0.001 0.008 0.008

(0.62) (0.62) (0.04) (0.06) (0.57) (0.57) Governance index- Anti-corruption A -0.006 -0.006 -0.004 -0.004 -0.006 -0.006

(-0.69) (-0.68) (-0.38) (-0.37) (-0.68) (-0.68) GDP A 0.001 0.000 0.002 0.001 0.001 0.000

(0.25) (0.06) (0.54) (0.36) (0.30) (0.13) Ln (Import + Export/GDP) A -0.005 -0.007 0.004 0.003 -0.005 -0.006

(-0.64) (-0.77) (0.38) (0.25) (-0.51) (-0.64) Corporate income tax rate A 0.000 0.000 0.000 0.000 0.000 0.000

(1.50) (1.52) (1.38) (1.39) (1.50) (1.52) Left government A -0.008** -0.008** -0.013*** -0.013*** -0.008** -0.008**

(-2.22) (-2.14) (-2.93) (-2.85) (-2.22) (-2.13) Creditor right index T 0.001 0.001 0.001 0.001 0.001 0.001

(0.71) (0.70) (0.58) (0.58) (0.72) (0.71) Governance index- Rule of law T 0.034*** 0.035*** 0.029** 0.029** 0.034*** 0.035***

(3.12) (3.15) (2.25) (2.28) (3.12) (3.16) Governance index- Anti-corruption T -0.016** -0.016** -0.011 -0.011 -0.016** -0.016**

(-2.04) (-2.05) (-1.22) (-1.23) (-2.04) (-2.06) GDP T -0.000 -0.000 -0.001 -0.001 -0.000 -0.000

(-0.16) (-0.12) (-0.50) (-0.47) (-0.16) (-0.13)

Ln (Import + Export/GDP) T -0.004 -0.004 -0.003 -0.003 -0.004 -0.004 (-0.44) (-0.44) (-0.29) (-0.29) (-0.45) (-0.44)

Corporate income tax rate T -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 (-0.44) (-0.47) (-0.58) (-0.61) (-0.44) (-0.48)

Left government T 0.000 0.000 -0.001 -0.001 0.000 0.000 (0.15) (0.11) (-0.20) (-0.23) (0.14) (0.10)

EPL index T -0.002 -0.002 -0.004 -0.004 -0.002 -0.001 (-0.49) (-0.47) (-1.17) (-1.15) (-0.47) (-0.46)

Inverse Mills Ratio -0.002 -0.002 (-0.18) (-0.19)

Constant 0.067 0.089 0.032 0.055 0.062 0.084 (0.47) (0.62) (0.21) (0.34) (0.43) (0.58)

Observations 2,972 2,972 2,972 2,972 2,972 2,972 Year FE YES YES YES YES YES YES Industry FE YES YES YES YES YES YES Adj. R-squared 0.0533 0.0531 0.0458 0.0455 0.0530 0.0528 This table reports results of ordinary least squares (OLS) regressions of the acquirers’ three-day and five-day cumulative abnormal returns on the indicator variable equal 1 if the firm has employee representatives on the board and, zero otherwise. The sample contains 2,972 acquisitions from 2001 to 2015 for 15 European companies. The dependent variable is three and five-day cumulative abnormal returns centered on acquirers’ announcement date. In the last two columns, we add Mill’s ratio as a control variable following its calculation using unreported Probit model (Heckman, 1976). We lag all the control variables by 1 year before the announcement year. All regressions control for industry and year fixed effects, and we cluster the standard errors at the firm level. We suppress the coefficients related to fixed effects for brevity and report the robust t-statistics in the bracket.

Table 6

Subsample Analyses (1) (2) (3) (4) CAR [-2, +2] Emp-Rep intensity x Large deal 0.012* (1.67) Emp-Rep intensity x High-coordination industry 0.010* (1.67) Emp-Rep intensity x High Labor cost industry 0.017*** (2.91) Emp-Rep intensity x Low Union Rate A 0.015* (1.93) Constant 0.077 0.087 0.028 0.234 (0.48) (0.54) (1.17) (1.24) Control Variables as Table 2.5 YES YES YES YES Year FE YES YES YES YES Industry FE YES YES YES YES Adj. R-squared 0.046 0.047 0.048 0.048 Observations 2,972 2,972 2,972 2,972

This table reports results of ordinary least squares (OLS) regressions of the acquirers’ three-day and five-day cumulative abnormal returns on the indicator variable equal 1 if the firm has employee representatives on the board and, 0 otherwise. The table reports our findings in Table 5 based on different sub-samples. The sample contains 2,972 acquisitions and covers the years 2001 to 2015 for 15 European companies. The dependent variable is five-day cumulative abnormal returns centered on acquirers’ announcement date. In columns 1 to 4, we divide the sample based on the size of the deal, the acquiring firm's industry, acquiring the country’s governance index, and its union score. The High refers to those numbers that are more than the sample Median and Low relates to numbers less than Median. In column 3, we define the high coordination industries following Fauver & Fuerst, 2006 as industries that the role of private information of employees is more important in firms’ investment decisions. Following Fauver & Fuerst, 2006 we define these industries as Trade industry with SIC equals 50-59, Transportation industry with SIC code equals 40-49, and Manufacturing industry with SIC code equals to 28-29, and 33-39. All control variables are lagged by 1 year and defined in Table A1 in the Appendix. All regressions control for industry, and year country fixed effects and the standard errors are clustered at firm id variable. We suppressed the coefficients related to fixed effects for brevity. Robust t-statistics are reported in brackets.

Table 7 Employees on the board and acquirers’ long-term performance

(1) (2) ΔROA [-4, +4] ΔROA [-4, +4]

Emp-Rep 0.412* (-1.74) Emp-Rep intensity 0.242*

(-1.7) Constant 10.174 10.982

(-1.25) (-1.3) Control Variables as Table 2 YES YES Year FE YES YES Industry FE YES YES Adj. R-squared 0.01 0.01 Observations 1,697 1,697

This table reports results of ordinary least squares (OLS) regressions of the changes in acquirers’ profitability from four years prior to the announcement year to four years following a deal completion on the indicator variable equal 1 if the firm has employee representatives on the board and, 0 otherwise. The sample contains 1,697 acquisitions from 2001 to 2015 for 15 European companies. The dependent variable is 8-year (from the year -4 to +4) change in return on asset of acquiring firms. All control variables are lagged by 1 year and defined in Table A1 in the Appendix. All regressions control for industry, and year fixed effects and the standard errors are clustered at firm id variable. We suppressed the coefficients related to fixed effects for brevity. Robust t-statistics are reported in brackets.

Table 8 Post-merger restructuring

(1) (2) (3) (4) Probability of layoff

BLER -0.300*

(-1.93) BLER intensity -0.175* 0.082 0.015

(-1.72) (0.53) (0.10) High Labor cost industries 0.214

(1.25) BLER intensity x High Labor cost industries -0.389**

(-2.19) High-coordination industry 4.841***

(12.23) BLER intensity x High-coordination industry -0.288*

(-1.66) Ln(Size) 0.105*** 0.105*** 0.108*** 0.105***

(3.92) (3.89) (4.03) (3.90) EBIT/AT -2.145** -2.158** -2.128*** -2.161***

(-5.51) (-5.54) (-5.44) (-5.55) Leverage 0.335 0.337 0.315 0.317

(1.10) (1.10) (1.04) (1.04) Market/Book -0.056** -0.056** -0.057*** -0.057***

(-3.84) (-3.84) (-3.90) (-3.84) HHI2 0.114 0.132 0.173 0.128

(0.53) (0.62) (0.81) (0.59) Board Avg Retire 0.021* 0.021* 0.021* 0.020*

(1.86) (1.82) (1.80) (1.75) Tender deals 0.080 0.078 0.068 0.088

(0.59) (0.57) (0.50) (0.65) Toehold 0.051 0.063 0.050 0.087

(0.27) (0.33) (0.26) (0.46) Civil legal origin -0.468 -0.481 -0.523* -0.540*

(-1.51) (-1.54) (-1.69) (-1.70) EPL 0.330 0.328 0.337 0.354

(1.41) (1.38) (1.43) (1.48) Union 0.005 0.004 0.004 0.004

(1.63) (1.43) (1.37) (1.26) Unemployment rate -0.054* -0.052* -0.061** -0.045

(-1.91) (-1.85) (-2.11) (-1.64) CPI 0.167** 0.169** 0.188*** 0.162**

(2.52) (2.54) (2.81) (2.42) Constant -11.414** -11.408** -11.420*** -11.428***

(-19.07) (-19.09) (-20.35) (-19.95)

Observations 2,768 2,768 2,768 2,768 Pseudo R2 0.132 0.132 0.135 0.134

This table reports results of ordinary least squares (OLS) regressions of the acquirers’ two-year post-merger layoff, on the indicator variable equal 1 if the firm has employee representatives on the board and, 0 otherwise. The major layoff defines if the firm reduces its employee number by 10% and more. High Labor cost industry are defined based on industry average workers’ compensation higher than median level. All control variables are lagged by 1 year and are defined in Table A1 in the Appendix. All regressions control for industry, and year fixed effects and the

standard errors are clustered at country-level variable. We suppressed the coefficients related to fixed effects for brevity. Robust t-statistics are reported in brackets.