Abstract
Exploiting a novel measure of takeover vulnerability mainly based on state legislations, we explore the effect of hostile takeover threats on credit ratings. Our results reveal that companies with more takeover exposure are assigned significantly better credit ratings. In particular, a rise in takeover vulnerability by one standard deviation results in an improvement in credit ratings by 7.89%. Our findings are consistent with the view that the disciplinary mechanism associated with the takeover market mitigates agency problems and ultimately raises firm value. Further analysis corroborates our conclusion, including propensity score matching, entropy balancing, and an instrumental-variable analysis. As our proxy for takeover susceptibility is plausibly exogenous, our results are more likely to show a causal effect.
Highlights
There has been a vast literature in corporate governance
Exploiting a novel measure of takeover vulnerability primarily based on state legislations, we demonstrate that stronger takeover vulnerability improves credit ratings significantly
Exploiting a novel measure of takeover susceptibility recently invented by Cain et al (2017) [9], we investigate how credit rating agencies view hostile takeover threats
Summary
Anyone can access the data with a simple subscription to the database. Our data on firm characteristics are from COMPUSTAT. A subscription is available through the Wharton Research Data Service. Exploiting a novel measure of takeover vulnerability mainly based on state legislations, we explore the effect of hostile takeover threats on credit ratings. Our results reveal that companies with more takeover exposure are assigned significantly better credit ratings. A rise in takeover vulnerability by one standard deviation results in an improvement in credit ratings by 7.89%. As our proxy for takeover susceptibility is plausibly exogenous, our results are more likely to show a causal effect
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