The effect of international takeover laws on corporate resource adjustments: Market discipline and/or managerial myopia?

James N Cannon (), Bingbing Hu (), Jay Junghun Lee () and Daoguang Yang ()
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James N Cannon: Utah State University
Bingbing Hu: Hong Kong Baptist University
Jay Junghun Lee: University of Massachusetts Boston
Daoguang Yang: University of International Business and Economics

Journal of International Business Studies, 2020, vol. 51, issue 9, No 4, 1443-1477

Abstract: Abstract Practitioners often claim that takeover pressure induces managerial myopia (short-termism), but academic research provides limited empirical evidence supporting this assertion. Our study fills this void by investigating how takeover threat influences managers’ resource-adjustment decisions. Specifically, we exploit the staggered enactments of merger and acquisition laws across countries as exogenous shocks that facilitate takeover transactions and increase takeover threat. While we find some evidence that takeover laws deter managers from acquiring and retaining excess resources (market discipline), we find more prevailing evidence that such law enactments induce managers to pursue short-term profits through underinvesting in resources meant to create long-term value (managerial myopia). Cross-country analyses reveal that the effect of takeover legislation on resource adjustments is concentrated in countries with weak investor protection and in countries with short-term-oriented culture. Consistent with managerial myopia, we also find that corporate resources contribute less to the long-term value in the post-enactment period, and that firm profitability improves immediately after the enactment, but then gradually reverts to the pre-enactment level. Collectively, our evidence suggests that policymakers, corporate boards, investors, and researchers, when assessing the net effects of takeover threats, should consider both the downside of inciting myopic behavior and the upside of tightening managerial discipline.

Keywords: takeover laws; resource adjustments; market discipline; managerial myopia; short-termism; cost asymmetry (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (15)

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DOI: 10.1057/s41267-020-00370-6

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