The effect of international takeover laws on corporate resource adjustments: Market discipline and/or managerial myopia?
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The effect of international takeover laws on corporate resource adjustments: Market discipline and/or managerial myopia? James N Cannon1, Bingbing Hu2, Jay Junghun Lee3 and Daoguang Yang4 1
School of Accountancy, Jon M. Huntsman School of Business, Utah State University, 3500 Old Main Hill, Logan, UT 84322, USA; 2 Department of Accountancy and Law, Hong Kong Baptist University, Kowloon, Hong Kong; 3 Department of Accounting and Finance, College of Management, University of Massachusetts Boston, 100 Morrissey Blvd, Boston, MA 02125, USA; 4 Department of Accountancy, Business School, University of International Business and Economics, #10 Huixin Dongjie, Chaoyang District, Beijing 100029, China Correspondence: JJ Lee, Department of Accounting and Finance, College of Management, University of Massachusetts Boston, 100 Morrissey Blvd, Boston, MA 02125, USA e-mail: [email protected]
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-termoriented culture. Consistent with managerial myopia, we also find that corporate resources contribute less to the long-term value in the postenactment 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. Journal of International Business Studies (2020). https://doi.org/10.1057/s41267-020-00370-6 Keywords: takeover laws; resource adjustments; market discipline; managerial myopia; short-termism; cost asymmetry
Electronic supplementary material The online version of this article (https://doi.org/10.1057/s41267-020-003706) contains supplementary material, which is available to authorized users. Received: 20 July 2018 Revised: 1 September 2020 Accepted: 8 September 2020
INTRODUCTION A broad international business literature seeks to understand how variations in country-level institutions influence managers’ decision-making (e.g., E
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