Does Takeover Activity Affect Stock Price Crash Risk? Evidence from International M&A Laws

51 Pages Posted: 26 Jan 2018 Last revised: 16 Jul 2018

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Hoang Luong

School of Economics, Finance, and Marketing, RMIT University

Lily Nguyen

La Trobe University; Financial Research Network (FIRN)

Date Written: June 11, 2018

Abstract

Using the staggered initiation of mergers and acquisitions (“M&A”) laws across countries as an exogenous shock to the threat of takeover, we find significant decreases in stock price crash risk following the passage of M&A laws. This effect is stronger in countries with poorer investor protection and information environments but is weaker for firms with greater institutional block ownership, product market competition, and analyst coverage. Further, earnings management, an explicit form of managerial bad-news hoarding, decreases in the post-law periods. Our findings suggest that the threat of takeover disciplines managers by curbing their bad-news hoarding, a precursor of crash risk.

Keywords: M&A laws, Takeover, Crash risk, Bad-news hoarding, Earnings management

JEL Classification: G23, G32, G34

Suggested Citation

Balachandran, Balasingham and Duong, Huu Nhan and Luong, Hoang and Nguyen, Lily, Does Takeover Activity Affect Stock Price Crash Risk? Evidence from International M&A Laws (June 11, 2018). Available at SSRN: https://ssrn.com/abstract=3109489 or http://dx.doi.org/10.2139/ssrn.3109489

Balasingham Balachandran

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Hoang Luong (Contact Author)

School of Economics, Finance, and Marketing, RMIT University ( email )

445 Swanston Street
Melbourne, VIC 3000
Australia

Lily Nguyen

La Trobe University ( email )

Melbourne, VIC, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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