Does Takeover Activity Cause Managerial Discipline? Evidence From International M&A Laws

Abstract:     
The staggered initiation of takeover act across countries offers a natural experiment to examine the causal effects of the market for corporate control on managerial discipline. The passage of M&A laws increased the threat of takeover, causing a significant increase in the level of M&A activity. Exploiting this exogenous source of variation in the threat of takeover, we show that the propensity to replace poorly performing CEOs increases following the enactment of M&A laws. Taking advantage of differences in legal protection and firm-level internal governance as a second source of variation, we also show that this increased sensitivity of CEO turnover to performance depends on availability of internal governance mechanisms as substitutes. Managerial discipline is positively related to the threat of takeover in countries where internal firm level governance mechanisms are weakest.

Number of Pages in PDF File: 64

Keywords: threat of takeover, managerial discipline, mergers and acquisitions laws, corporate control

JEL Classification: G34, G38, K22

working papers series