Investment Decisions and Managerial Discipline: Evidence from the Takeover Market

Abstract

This paper focuses on the relative importance of board monitoring and the hostile takeover market in disciplining managers that make poor acquisition decisions. Contrary to Mitchell and Lehn (1990), there is little evidence that takeovers that are poorly received by capital markets result in a firm becoming the target of a hostile takeover. A forced turnover of a top executive is more likely, however, the more negative is the abnormal return associated with an acquisition announcement. The relationship between forced turnover and negative acquisition returns is stronger during periods of less intense hostile takeover activity. Hence, it appears that being disciplined for making a poor acquisition is more a function of internal discipline than the workings of the takeover market.