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

See all articles by Ronen Israel

Ronen Israel

Interdisciplinary Center, Herzliyah

Qiang Johnny Ma

Stephen M. Ross School of Business at the University of Michigan

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

Israel, Ronen and Ma, Qiang Johnny, Investment Horizon and the Market for Corporate Control: The Defensive Role of Long-Term Investments (September 1999). Interdisciplinary Center Herzliya Working Paper, Available at SSRN: https://ssrn.com/abstract=234874 or http://dx.doi.org/10.2139/ssrn.234874

Ronen Israel (Contact Author)

Interdisciplinary Center, Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel
972-9-9527306 (Phone)

Qiang Johnny Ma

Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-763-6822 (Phone)
734-936-0279 (Fax)

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