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Intra-Industry Effects of Control Threats on Investment, Financing, and Financial Reporting Quality

55 Pages Posted: 13 Feb 2008 Last revised: 17 Jul 2014

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

Ane Tamayo

London School of Economics & Political Science (LSE)

Date Written: May 13, 2009

Abstract

This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. We document two major responses. First, the industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. Second, they increase the quality of financial reporting: after the control threat, there is evidence of less earnings management, more timely loss recognition, and more value relevance of accounting earnings. We also find that the stock price reaction upon announcement of the takeover is larger for peer firms with higher capital spending, less debt, fewer takeover defenses in place, and lower insider ownership. These findings are consistent with Jensen's (1986, 1993) and Shleifer and Vishny's (1988) observation that agency costs often manifest themselves at the industry level, and with Bushman and Smith's (2001) conjecture that changes in takeover pressure can alter managerial incentives to distort firms' accounting numbers. Our results also highlight the relation between financial reporting quality and financing and investment policies.

Keywords: Hostile takeover, agency costs, investment decisions, capital structure financial reporting quality

JEL Classification: G31, G32, G34, G35, M41, M43, D82

Suggested Citation

Servaes, Henri and Tamayo, Ane, Intra-Industry Effects of Control Threats on Investment, Financing, and Financial Reporting Quality (May 13, 2009). Available at SSRN: https://ssrn.com/abstract=1092796 or http://dx.doi.org/10.2139/ssrn.1092796

Henri Servaes (Contact Author)

London Business School ( email )

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HOME PAGE: http://faculty.london.edu/hservaes/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Ane Miren Tamayo

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)

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