Revisiting the Disciplinary Role of Failed Takeover Attempts

Abstract

This study provides evidence on the disciplinary role of failed takeover attempts. We find that the likelihood of CEO turnover in target firms following failed takeover attempts is 21% greater than non-target firms matched on the basis of industry, past stock returns, size, and market-to-book ratio. Further, CEO turnover in target firms is negatively correlated with the firms’ stock returns during the period from the onset of the takeover attempt through its resolution and with the firms’ stock price performance prior to the failed attempt. We also find that target firms are 14% more likely than non-target firms to initiate corporate restructurings during the failed attempt. Restructured target firms have more positive stock returns in this period and are less likely to experience subsequent CEO turnover. When restructurings do not occur, an active outside blockholder is more likely to emerge and to facilitate the ouster of the target CEO. Together these findings indicate that failed takeover attempts act as “wake-up calls” either to target managers to make potentially value-increasing improvements or to active investors to replace target managers who have underperformed prior to and/or during the failed attempt.