Board Effectiveness and Internalization Benefits: Theory and Evidence from Value Creation in Cross-Border Acquisitions

Abstract

This study examines how the value creation potential of technological and marketing intangible assets in foreign direct investment (FDI) varies with board effectiveness conditions. Synthesizing internalization and agency theories, we theorize that a firm is better positioned to leverage its intangibles and create value through acquisitive FDI if its board is set up for effective monitoring and advising. Empirically, we implement an original three-part model to account for endogenous disclosure and expansion decisions, and operationalize the "quad" elements of board effectiveness, namely independence, expertise, bandwidth, and motivation. Analyzing 675 cross-border acquisitions by U.S. public firms (1998-2016), we verify and extend core internalization results about the association between intangibles and abnormal returns upon FDI announcement. Advancing internalization research through corporate governance insights, our findings support that board effectiveness moderates the value-creating effects of intangibles in multinational enterprises' foreign expansion.