The effect of international takeover laws on corporate resource adjustments: Market discipline and/or managerial myopia?

James N. Cannon, Bingbing HU, Jay Junghun Lee*, Daoguang Yang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Practitioners often claim that takeover pressure induces managerial myopia (short-termism), but academic research provides limited empirical evidence supporting this assertion. Our 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.

Original languageEnglish
Pages (from-to)1443-1477
Number of pages35
JournalJournal of International Business Studies
Volume51
Issue number9
DOIs
Publication statusPublished - Dec 2020

Scopus Subject Areas

  • Business and International Management
  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Strategy and Management
  • Management of Technology and Innovation

User-Defined Keywords

  • cost asymmetry
  • managerial myopia
  • market discipline
  • resource adjustments
  • short-termism
  • takeover laws

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