Do Takeover Threats Suppress Corporate Willingness to Invest? Evidence from State Antitakeover Legislations

Abstract

We use a revealed-preference approach to assess the impact of the exogenous relief in takeover threats, proxied by the staggered passages of state antitakeover laws, on corporate willingness to invest. By estimating an augmented investment Euler equation, we find that firms, particularly those are small, belonging in competitive industries, and bearing severe agency problems, apply lower discount rates to their investments after the legislations. The results hold up to addressing several legal and institutional aspects of the legislations. Using high-order moment estimators, we find that the investment-q sensitivities of affected firms, especially of those experiencing sharper discount rate declines, increase after the passage of the laws. Our results suggest that takeover pressure suppresses corporate desire to invest.