The Impact of the EU Takeover Directive on Takeover Performance and Empire Building
University of New South Wales - Australian School of Business; Financial Research Network (FIRN)
January 27, 2012
Journal of Corporate Finance, Vol. 18, No. 2, 2012
UNSW Australian School of Business Research Paper
This paper uses the EU Takeover Directive as a natural experiment to test when legal harmonization creates value, and to examine the impact of increased entrenchment on investment decisions. The EU promulgated the Takeover Directive in April 2004. The implementation deadline was May 2006. The goal was to encourage value-creating takeovers by harmonizing takeover laws across the EU. However, the takeover directive has received criticism for being vague and discretionary, and for entrenching managers. I hypothesize that because the directive hinders takeovers, it might increase managerial entrenchment and enable managers of EU-companies to make agency-motivated investments (or simply exercise less discipline). I find supportive evidence: after the directive, EU-companies make investments that are less profitable (as proxied by takeover returns) and that take longer to compete. Further, asset growth increased in treated companies following the takeover directive, suggesting that the additional entrenchment facilitates empire building.
Number of Pages in PDF File: 52
Keywords: Takeover Directive,Takeovers, Legal Harmonization, European Union, Entrenchment
JEL Classification: G34, G38, K22Accepted Paper Series
Date posted: January 29, 2012 ; Last revised: November 13, 2012
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