Product Market Threats and Corporate Takeovers

Abstract

We explore the connection between firm’s market threats from product market and corporate takeover activities. Using product market fluidity as measure for market threatening, which is borrowed from Hoberg, Phillips and Prabhala (2014), we find that firms facing more market threats ended with lower announcement returns in M&A. Furthermore, our empirical evidence indicates that after M&A, acquirers who originally reside in highly fluid market enjoy less threatening environment while firms locate in lowly fluid market experience more instabilities in competition environment. Post-takeover performance for firms in high threatening markets are worse than those in more stable markets. Importantly, we document a new dimension of acquirer-and-target pairing issue in M&A. We show that fluidity increases firms’ propensity to seek deal-makings, and firms generally takeover targets locate in environment of similar market threatening, even after controlling for market competition and firm valuation factors.