Abstract
Using combinations of accounting and stock market performance measures, we advance a comprehensive multidimensional framework for modelling management performance. This framework proposes “poor” management, “myopia”, “hyperopia” and “efficient” management, as four distinct attributes of performance. We show that these new attributes align with, and extend, existing frameworks for modelling management short-termism. We apply this framework to test the management inefficiency hypothesis using UK data over the period 1988 to 2017. We find that takeover likelihood increases with “poor” management and “myopia”, but declines with “hyperopia” and “efficient” management. Our results suggest that managers who focus on sustaining long-term shareholders' value, even at the expense of current profitability, are less likely to be disciplined through takeovers. By contrast, managers who pursue profitability at the expense of long-term shareholder value creation are more likely to face takeovers. Finally, we document the role of bidders as enforcers of market discipline.
Highlights
Management performance is perhaps one of the most explored latent variables in empirical accounting, corporate finance and business management research
We explore whether the attributes are valid and distinct from each other
The independent variables include the return on capital employed (ROCE), average abnormal returns (AAR), Tobin's Q (TBQ), liquidity (LIQ), leverage (LEV), sales growth (SGW), growth-resource mismatch dummy (GRD), industry disturbance dummy (IDD), free cash flow (FCF), proportion of tangible assets (TANG), firm size (SIZE), firm age (AGE), Herfindahl-Hirschman Index (HHI), block holders dummy (BLOC), rumour dummy (RUM), price momentum (MOM), trading volume (TVOL) and market sentiment (SENT)
Summary
Management performance is perhaps one of the most explored latent variables in empirical accounting, corporate finance and business management research. Prior studies (see, for example, Wiersma, 2017; Bennouri, Chtious, Nagati, & Nekhili, 2018; Paniagua, Rivelles, & Sapena, 2018) use measures of accounting profitability, including return on assets (ROA), return on equity (ROE) and return on capital employed (ROCE), as empirical proxies of management or firm performance, while others (see, for example, Li, Qiu, & Shen, 2018; Bennouri et al, 2018; Owen & Temesvary, 2018) use market-based measures such as average abnormal returns (AAR), stock price growth and Tobin's Q, for the same purpose. It recognises that these measures proxy for distinct performance attributes and, are complements, not substitutes
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