Takeover Market Research Articles

Climate change exposure and the takeover market: A text‐based analysis

AbstractWe examine the impact of takeover vulnerability on firm‐specific climate change exposure using sophisticated text‐based metrics generated from machine learning algorithms and a measure of takeover vulnerability primarily derived from state takeover laws. Based on a large sample of more than 28,000 observations, our findings show that firms more vulnerable to hostile takeovers have higher exposure to physical climate risks, as managers focus on short‐term financial performance over long‐term risk mitigation. These firms also reduce regulatory risk exposure by adopting stringent compliance measures and improving environmental practices to avoid penalties and attract investors. However, they are less likely to invest in new business opportunities related to climate change, prioritizing stability over potential gains in new business opportunities. Propensity score matching and entropy balancing confirm the robustness of these results. Our research provides insights into how hostile takeover threats influence corporate environmental strategies.

Bidder-Specific Synergies and the Evolution of Acquirer Returns

Largely constant average acquirer returns over the past four decades mask fundamental changes in the takeover market. Controlling for bidder composition, the common component of acquirer returns has increased by five percentage points relative to the 1980s. Offsetting this increase, the average bidder-specific component has declined. We propose a theory of bidder-specific synergies to help interpret these opposing trends. In our theory and in the data, acquirer returns increase with the extent to which synergies are unique to that bidder. The composition effect reflects bidder uniqueness. Overall, the evidence is consistent with rising merger synergies that have become less bidder specific. This paper was accepted by Victoria Ivashina, finance. Funding: A. Golubov acknowledges financial support from the Bank of Canada [Governor’s Award]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02208 .

ESG controversies, corporate governance, and the market for corporate control

ABSTRACT Capitalizing on a unique measure of takeover vulnerability, we examine how the takeover market, which is widely regarded as a crucial instrument of external governance, influences environmental, social, and governance (ESG) controversies. This paper is the first to investigate how corporate control markets are influenced by the market for corporate control. The sample consists of unbalanced panel data from 6,236 firm-year observations during 2002–2014. We use Propensity Score Matching (PSM) and Instrumental Variable (IV) analyses to address potential endogeneity, and entropy-balancing approach to address the issue of observable selection. The results show that the disciplinary mechanism associated with the takeover market compels managers to take actions that benefit shareholders, thus avoiding ESG controversies. An increase in takeover susceptibility by one standard deviation resulted in a 10.12% decline in controversial activities. Furthermore, we find that firm profitability drops, and risk increases substantially in response to ESG controversies.

External audit quality, auditor selection and hostile takeovers: evidence from half a century

PurposeExploiting a unique measure of hostile takeover exposure principally based on the staggered adoption of state legislations, the authors investigate how external audit quality is influenced by the discipline of the takeover market. External auditors and the takeover market both function as important instruments of external corporate governance.Design/methodology/approachThe authors execute a standard regression analysis and run a variety of robustness checks to minimize endogeneity, namely, propensity score matching (PSM), entropy balancing, an instrumental-variable analysis, Generalized method of moment (GMM) dynamic panel data analysis and Lewbel's (2012) heteroscedastic identification.FindingsThe authors’ immense sample spans half a century, encompassing nearly 180,000 observations and 17 takeover-related state legislations, one of the largest samples in the literature in this area. The authors’ results suggest that firms with more takeover exposure are significantly less likely to use Big N auditors. Therefore, a more active takeover market results in poorer external audit quality, corroborating the substitution hypothesis. The discipline of the takeover market substitutes for the necessity for a high-quality external auditor. Specifically, a rise in takeover susceptibility by one standard deviation lowers the probability of using a Big N auditor by 4.29%.Originality/valueThe authors’ study is the first to examine the effect of the takeover over market on audit quality using a novel measure of hostile takeover susceptibility mainly based on the staggered implementation of state legislation. Because the enactment of state legislation is beyond the control of any firm individually, it is plausibly exogenous. The authors’ results therefore probably reflect a causal influence rather than merely a correlation.

Economic shocks, M&A advisors, and industry takeover activity

The paper examines the role of M&A advisors in propagating takeover activity following economic shocks that affect industry conditions. M&A advisors constitute an important intermediary in the market for corporate control by enhancing M&A success at a transaction level. We posit that, at an industry level, M&A advisors also play a significant role in propagating aggregate merger activity in the wake of an industry shock. The empirical results show a positive, significant relationship between the presence of M&A advisors and industry takeover activity, and offer evidence supporting the incremental role of M&A advisors following industry shocks. The results are robust to empirical strategies aimed at alleviating endogeneity concerns, including using a legislative change as an exogenous shock to M&A advisors and exploring reverse causality. Our evidence offers novel insights on the collective role of M&A advisors in the takeover market.

Do Classified Boards Deter Takeovers? Evidence from Merger Waves

AbstractWe exploit the arrival of industry-wide synergistic merger waves to identify whether classified boards deter takeover bids. In a stylized model, we show that when target classified boards are costly to bidders, their negative effect on takeover likelihood should be more pronounced during merger waves. Using a sample of takeover bids in the United States between 1990 and 2016, we find strong evidence supporting this prediction. The results are robust to accounting for the benefits of classified boards and controlling for other antitakeover provisions. Our findings suggest that classified boards effectively reduce a firm’s exposure to the takeover market.

International experience of raidership

Raidership is a constant threat to any business that cannot be predicted and completely eradicated. According to analytical data, raidership is one of the most serious threats to business. Its spread is a consequence of the illusions of business owners who are convinced that by exercising total control over business management. These are only illusions. Raidership as a concept originated in Great Britain. This term was used to describe raids by ships that seized merchant ships from other countries. Over the past 20 years, corporate raids have largely depended on the political, legal, and institutional situation in a country. In developed countries, there is usually no active market for hostile takeovers. Counteracting raidership in different countries of the world involves both general and targeted restrictions on share transactions; creation and compliance with corporate governance codes; and adoption of special laws regulating mergers and acquisitions. Not only governments, but also non-governmental organizations are actively involved in developing general approaches to the principles of protecting business entities from raidership. The efforts of state authorities are primarily aimed at improving corporate legislation to ensure that certain standards of competition, disclosure of information about the company, protection of shareholders' rights and equal treatment are mandatory. The business community is focused on developing corporate governance rules and procedures that would be voluntarily adopted by the business community, comply with internationally recognized principles and take into account national peculiarities. This work resulted in the emergence of so-called Corporate Governance Codes in various developed countries. Such a code is a set of voluntarily adopted standards and internal regulations that establish and regulate corporate relations.

The takeover market’s effect on managerial ownership: evidence from hostile takeover susceptibility

PurposeCapitalizing on a unique measure of takeover susceptibility principally based on the staggered implementation of state laws, this study aims to explore the takeover market’s effect on managerial ownership. The market for corporate control, often known as the takeover market, is an important external governance mechanism, whereas managerial ownership is a vital internal governance instrument. Managerial ownership brings into convergence the interests of shareholders and managers. The originality of this study arises from the usage of state-level anti-takeover legislations as a measure which is beyond the control of firms and plausibly exogenous to firm-specific characteristics.Design/methodology/approachIn addition to the standard regression analysis, this study also executes a variety of robustness checks to minimize endogeneity, i.e. propensity score matching, entropy balancing, instrumental–variable analysis, Lewbel’s (2012) heteroscedastic identification and Oster’s (2019) testing for coefficient stability.FindingsBased on a large sample of US firms, the results show that more hostile takeover threats bring about significantly lower managerial ownership. The results reinforce the prediction of the substitution hypothesis. The disciplinary function of the takeover market reduces agency conflict to the point where managerial ownership is less necessary as a governance mechanism. Specifically, a rise in takeover susceptibility by one standard deviation diminishes managerial ownership by 7.22%.Originality/value`To the best of the authors’ knowledge, this study is the first to shed light on the impact of the takeover market on managerial ownership using a novel measure mainly based on the staggered adoption of state laws, which are plausibly exogenous to individual firms’ characteristics. Consequently, unlike prior research, this study is more likely to indicate a causal effect, rather than merely a correlation.

Carbon emissions, corporate governance, and hostile takeover threats

AbstractExploiting a unique measure of takeover vulnerability principally based on state legislations, we investigate how corporate carbon reduction efforts are influenced by the takeover market, which is widely regarded as a crucial instrument of external corporate governance. Our results show that more takeover exposure brings about significantly greater efforts to reduce carbon emissions. A rise in takeover susceptibility by one standard deviation improves carbon reduction performance by 12.81%. The findings corroborate the notion that the takeover market, acting as an external governance mechanism, compels managers to adopt policies that benefit shareholders in the long run. Our results imply that carbon emissions are a crucial corporate outcome as it is subject to the pressure from the takeover market. Companies should pay a close attention to this matter. Further analysis robustly validates the results, including propensity score matching, entropy balancing, an instrumental variable analysis, and heteroscedastic identification. Our measure of takeover vulnerability is plausibly exogenous and thus probably reveals a causal effect, rather than a mere association.

CSR variability, managerial risk aversion, and hostile takeover threats

AbstractThe quiet life hypothesis argues that, when managers are insulated from the discipline of the takeover market, they tend to be less ambitious, avoiding risky and complex investments that require more managerial time and efforts. In other words, they prefer to live a “quiet life.” Exploiting a distinctive measure of takeover vulnerability principally based on the staggered passage of state legislations, we investigate the quiet life hypothesis using corporate social performance. Our results show that more takeover exposure significantly raises CSR variability, consistent with the prediction of the quiet life hypothesis, where managers adopt riskier CSR strategies and investments when they are more exposed to takeover threats, resulting in higher CSR volatility. Specifically, an increase in takeover exposure by one standard deviation raises CSR variability by 5.23%–6.73%. Additional analysis corroborates the results, including propensity score matching, instrumental‐variable analysis, Lewbel's heteroscedastic identification, and entropy balancing.

Corporate Culture, Innovation, and Female Board Representation: Evidence from Earnings Conference Calls

Exploiting a novel measure of corporate culture based on cutting-edge machine learning algorithms, we examine how female board representation influences a culture of innovation, and also whether female directors spur innovation culture in the presence of an active takeover market. Our results show that higher board gender diversity improves a corporate innovation culture considerably. Specifically, a rise in female board representation by one standard deviation improves an innovative culture by 4.37%. The findings corroborate the argument that female directors infuse the firm with new ideas and different perspectives, thereby enhancing an innovative culture. Furthermore, we also show that female board representation’s interaction with the takeover market, which is a crucial external governance mechanism, spurs a corporate innovation culture as well. This implies that board gender diversity substantially softens the negative effect of hostile takeover threats on corporate innovation. Our study is the first to link board gender diversity to a culture of innovation and show the interaction effect with takeover threats.

Scheme of Arrangement in the UK Takeover Market: Does it Make a Difference in Firms’ Survival to be Tendered?

Compared with tender offers, bidders can easily obtain target firms in the scheme of arrangements. This study investigates the impact of deal and target characteristics on 803 firms’ survival to be taken over by a scheme of arrangement or a tender offer in the UK takeover market, during the 1995 to 2018 period, through applying survival analysis, including continuous (PH Cox, Weibull) and discrete-time (complementary log-log) hazard models. The findings indicate that the explanatory variables of target and deal characteristics play a significant role in both the scheme of arrangement and tender offer deals. Firm size, financial crises, the takeover Code shock, and the termination fees paid by a target firm increase the probability of a takeover of the target firm to be implemented by way of a scheme. Acquirers who are publicly listed and own a large stake in the target firm before the takeover intend to reduce the target firm’s probability of being schemed.
 
 Received: 21 April 2022 / Accepted: 15 August 2022 / Published: 2 September 2022

Hostile takeover threats, managerial myopia and asset redeployability

PurposeExploiting two novel measures of takeover vulnerability and asset redeployability, this paper aims to investigate the effect of the takeover market on redeployable assets. Redeployable assets are those with alternative uses. Asset redeployability is a crucial concept in the literature on investment irreversibility.Design/methodology/approachIn addition to the standard regression analysis, the authors execute several robustness checks: propensity score matching, entropy balancing, instrumental-variable analysis and generalized method of moment dynamic panel data analysis.FindingsThe authors’ results reveal that more takeover threats reduce asset redeployability significantly, corroborating the managerial myopia hypothesis. Hostile takeover threats reduce managers’ job security and thus induce them to myopically focus on the current utilization of assets in the short run, rather than how they may be deployed in the long run, resulting in less asset redeployability.Originality/valueTo the best of the authors’ knowledge, this study is the first to investigate the effect of takeover threats on asset redeployability. Because the authors’ measure of takeover vulnerability is principally based on the staggered passage of state legislations, which are plausibly exogenous, the authors’ results likely reflect causality, rather than merely an association.

Earnings Growth and Acquisition Returns: Do Investors Gamble in the Takeover Market?

AbstractWe document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.

Exploring the relationship between takeover market and enterprise innovation: The mediating role of internal governance

This study explores the relationship between the takeover market and enterprise innovation. We also investigate the mediating role of internal governance (managers’ compensation incentives, equity incentives, boards of directors, and large shareholders) on the relationship between the takeover market and enterprise innovation. We use comprehensive panel data of 1307 firms listed on the Shenzhen and Shanghai stock exchanges for 2006-2016 to meet the study's objectives. We find that the takeover market positively and significantly influences corporate innovation. It improves corporate innovation ability by increasing managers’ compensation incentives. However, enterprise innovation ability decreases with an increase in managers’ equity incentives, large shareholders, and the board of directors. Finally, this study recommends useful policy implications to increase enterprise innovation in the Chinese financial market.

Do takeover threats influence corporate social responsibility? Evidence from hostile takeover vulnerability

AbstractTheory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, we investigate the effect of the takeover market on corporate social responsibility performance. Using a sample of 9200 firms in the USA, the study finds that an exogenous increase in takeover protection decreases corporate social responsibility, consistent with the managerial myopia theory that managers tend to be myopic when more exposed to hostile takeover threats, making investments that show results in the short run at the expense of long‐term projects. Furthermore, corporate social responsibility is harder to evaluate due to information asymmetry and tends to be discounted in the short run. Additional robustness checks confirm the results, including fixed‐effects and random‐effects regressions, propensity score matching and instrumental‐variable analysis. Our results are unlikely driven by endogeneity.

Too much of a good thing? Corporate social responsibility and the takeover market

We examine the relation between corporate social responsibility (CSR) and firm value using the takeover market as an empirical setting. Firms with high or low CSR scores experience a greater likelihood of takeover and lower wealth gains in takeovers relative to firms with moderate policies. These findings indicate that the takeover market acts as a corrective mechanism for firms that over- or under-invest in CSR. Our results are robust to controlling for governance and alternative motivations for mergers and are evident in sub-samples where CSR is arguably more important. Our findings are not driven by poor management of target firms. Overall, the evidence suggests that CSR generally benefits shareholders, however, very high or low CSR scores appear to be harmful.

Pre-deal differences in corporate social responsibility and acquisition performance

Drawing on the portability theory, we examine how the pre-deal gap in corporate social responsibility (CSR) between the bidder and target affects announcement returns in the international takeover market. We find that the higher the bidder's CSR scores relative to the target's, the higher is the synergy captured by combined cumulative abnormal returns of bidders and targets. It supports our hypothesis that synergistic gains are higher when the ex-ante bidder-target CSR gap is positive. The results also show that the synergy effect of CSR is not shared between bidder and target firms; thereby, bidders earn abnormal returns while targets lose. We further document that the acquirers with higher CSR practices before the acquisition are more likely to engage in related and non-cash-financed deals, and capital markets reward these acquisition choices. Finally, the results show that a positive CSR gap reduces the takeover premium and the time taken to complete the deal. Overall, the results suggest a positive valuation for the shareholders of the combined firm resulting from the portability of higher CSR practices from bidders to targets. Our results are subject to a battery of robustness tests, including alternative measures of combined returns and CSR, and tests for endogeneity.

Do hostile takeover threats matter? Evidence from credit ratings.

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.

The Takeover Market’s Effect on Managerial Ownership: Evidence From Hostile Takeover Susceptibility

The Takeover Market’s Effect on Managerial Ownership: Evidence From Hostile Takeover Susceptibility