The Effect of International Takeover Laws on Corporate Resource Adjustments: Market Discipline And/Or Managerial Myopia?

Journal of International Business Studies, 2020, Volume 51, 1773-1477.

Posted: 1 Oct 2020 Last revised: 31 Dec 2020

See all articles by James N. Cannon

James N. Cannon

Iowa State University; Utah State University, School of Accountancy

Bingbing Hu

Hong Kong Baptist University (HKBU)

Jay Junghun Lee

University of Massachusetts Boston

Daoguang Yang

University of International Business and Economics (UIBE)-Business School

Date Written: November 5, 2020

Abstract

Practitioners often claim that takeover pressure induces managerial myopia (short-termism), but academic research provides limited empirical evidence supporting this assertion. This study fills this void by investigating how takeover threat influences managers’ resource adjustment decisions. Specifically, we exploit the staggered enactments of merger and acquisition laws across countries as exogenous shocks that facilitate takeover transactions and increase takeover threat. While we find some evidence that takeover laws deter managers from acquiring and retaining excess resources (market discipline), we find more prevailing evidence that such law enactments induce managers to pursue short-term profits through underinvesting in resources meant to create long-term value (managerial myopia). Cross-country analyses reveal that the effect of takeover legislation on resource adjustments is concentrated in countries with weak investor protection and in countries with short-term-oriented culture. Consistent with managerial myopia, we also find that corporate resources contribute less to the long-term value in the post-enactment period and that firm profitability improves immediately after the enactment but then gradually reverts to the pre-enactment level. Collectively, our evidence suggests that policymakers, corporate boards, investors, and researchers, when assessing the net effects of takeover threats, should consider both the downside of inciting myopic behavior and the upside of tightening managerial discipline.
* The full-text is available at https://rdcu.be/b9N1I

Keywords: takeover laws, resource adjustments, market discipline, managerial myopia, short-termism, cost asymmetry

JEL Classification: G34, M16, M41

Suggested Citation

Cannon, James N. and Cannon, James N. and Hu, Bingbing and Lee, Jay Junghun and Yang, Daoguang, The Effect of International Takeover Laws on Corporate Resource Adjustments: Market Discipline And/Or Managerial Myopia? (November 5, 2020). Journal of International Business Studies, 2020, Volume 51, 1773-1477., Available at SSRN: https://ssrn.com/abstract=3689992

James N. Cannon

Utah State University, School of Accountancy ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
801-927-7718 (Phone)

Iowa State University ( email )

Ames, IA 50011-2063
United States
801-927-7718 (Phone)

Bingbing Hu

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Jay Junghun Lee (Contact Author)

University of Massachusetts Boston ( email )

College of Management
100 Morrissey Blvd.
Boston, MA 02125
United States
(617)287-3181 (Phone)

Daoguang Yang

University of International Business and Economics (UIBE)-Business School ( email )

#10 Huixindong St.
Chaoyang District
Beijing, 100029
China

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