Investment Horizon and the Market for Corporate Control: The Defensive Role of Long-Term Investments
Interdisciplinary Center Herzliya Working Paper
45 Pages Posted: 7 Aug 2000
Date Written: September 1999
Abstract
The relationship between managers' investment choice and takeover pressure has triggered intense debate since the mid 80's, yet the issue remains unresolved. In this article, we view investment horizon choice as a strategic move that puts target management in a better position in an anticipated future takeover contest. Our insight is that managers interested in retaining control may prefer long-term investments because the high uncertainties associated with these investments increase the expected takeover price, thereby reducing the takeover probabilities. This finding is in a sharp contrast to the result of most existing theories and to the common wisdom that takeover pressure induces myopic behavior. Nevertheless, it is consistent with empirical evidence. Our analyses generate testable predictions that can be used to further clarify the issue.
Keywords: Investment horizon, takeover defense, corporate control
JEL Classification: G31, G32, G34
Suggested Citation: Suggested Citation
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