How Do Industry Peers Respond to Control Threats?
Management Science, Forthcoming
39 Pages Posted: 23 Jun 2013
Date Written: March 1, 2013
This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. The industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. They also adopt more takeover defenses. The stock price reaction upon announcement of the takeover is positive and larger for peer firms with higher capital spending and higher free cash flows. Before the takeover attempt, the peer firms borrow less and invest more than predicted. Both stock returns and performance improve after the takeover attempt. These results are consistent with the argument that the control threat has important spillover effects for the other firms in the industry.
Keywords: Hostile takeover, agency costs, investment decisions, capital structure, payout policy, takeover defenses
JEL Classification: G31, G32, G34, G35
Suggested Citation: Suggested Citation