Does the Market for Corporate Control Influence Executive Risk-Taking Incentives? Evidence From Takeover Vulnerability

32 Pages Posted: 18 Nov 2020

See all articles by Viput Ongsakul

Viput Ongsakul

NIDA Business School, National Institute of Development Administration (NIDA)

Pattanaporn Chatjuthamard

Sasin GIBA

Napatsorn (Pom) Jiraporn

State University of New York (SUNY) - State University of New York (SUNY) at Oswego

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Date Written: October 1, 2020

Abstract

Purpose: We investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend to be risk-averse as they are more exposed to idiosyncratic risk, resulting in sub-optimal risk-taking that does not maximize shareholders’ wealth. The takeover market alleviates this problem, inducing managers to take more risk. Therefore, risk-taking incentives inside the firm are less powerful when the outside takeover market is more active.

Design/Methodology: Exploiting a novel measure of takeover vulnerability recently constructed by Cain, McKeown, and Solomon (2017), we explore how takeover vulnerability influences executive risk-taking incentives. Using a large sample of U.S. firms, we employ fixed-effects regressions, propensity score matching, and instrumental variable analysis

Findings: Consistent with our hypothesis, a more active takeover market results in less powerful risk-taking incentives. Specifically, a rise in takeover vulnerability by one standard deviation diminishes executive risk-taking incentives by 22.39%, an economically meaningful magnitude.

Originality/Value: Our study is the first to explore the effect of the takeover market on managerial risk-taking incentives, using a novel measure of takeover susceptibility. Our measure of takeover vulnerability is considerably less susceptible to endogeneity, enabling us to draw causal inferences with more confidence.

Keywords: Corporate Governance, Takeover Market, Risk-Taking Incentives, Vega, Market for Corporate Control

JEL Classification: G32, G34

Suggested Citation

Ongsakul, Viput and Chatjuthamard, Pattanaporn and Jiraporn, Napatsorn (Pom) and Jiraporn, Pornsit, Does the Market for Corporate Control Influence Executive Risk-Taking Incentives? Evidence From Takeover Vulnerability (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=3702865 or http://dx.doi.org/10.2139/ssrn.3702865

Viput Ongsakul

NIDA Business School, National Institute of Development Administration (NIDA) ( email )

118 Seri Thai Road
Bangkok, 10240
Thailand

Pattanaporn Chatjuthamard

Sasin GIBA ( email )

Bangkok
Thailand

Napatsorn (Pom) Jiraporn

State University of New York (SUNY) - State University of New York (SUNY) at Oswego ( email )

7060 NY-104
Oswego, NY 13126-3599
United States

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

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