Takeover Law Enforcement and Acquirer Returns

Abstract

This paper examines the impact of takeover law enforcement on corporate acquisitions. We use the European Takeover Directive as a natural experiment, which harmonizes takeover law across countries, while leaving its enforcement to the discretion of individual countries. We exploit this heterogeneity in enforcement quality across countries in a difference-in-differences-in-differences model, while employing an overall inductive research approach, following the recommendation in Karpoff and Whittry (2018). We find that acquirer returns increase in countries with changes in takeover law, driven by improved target selection and lower cost of financing. The increase in acquirer returns is lower in weak enforcement jurisdictions, which we identify by developing a novel Takeover Law Enforcement Index (TLEI). The findings show that takeover law can mitigate agency conflicts, but its true value depends on its enforcement. Our results are robust to a number of robustness tests.

Keywords: Mergers and acquisitions, acquirer returns, law and finance, takeover law, law enforcement

JEL Classification: G30, G34, G38, K20, K22