Discipline or Disruption? Stakeholder Relationships and the Effect of Takeover Threat
53 Pages Posted: 24 Jan 2011
Date Written: January 23, 2011
Abstract
The threat of hostile takeovers can impair the ability of firms to commit to long-term relationships with important stakeholders. Using the passage of business combination laws on a state-by-state basis as a source of exogenous variation, we find that a reduction in the threat of a hostile takeover leads to better operating and stock performance for firms that have principal non-government customers as important stakeholders. Reduction in takeover threat strengthens relationship with existing customers and increases ability to attract new customers. A sizeable literature suggests that shareholders prefer greater vulnerability to hostile takeovers as it reduces agency problems. However, our results imply that this may not be true for firms for which honoring implicit contracts and committing to long-term relationships are especially important.
Keywords: Customer-supplier Relationships, Takeover, Business Combination Law
JEL Classification: G34
Suggested Citation: Suggested Citation