Firm performance and managerial discipline in contests for corporate control
Abstract
This study examines the discipline imposed by the market for corporate control on top corporate management. For a sample of 291 tender offers occurring between 1958 and 1984, the individuals occupying the top five executive positions of the target firms are identified and followed for two years following the completion of the takeover. Both departures of incumbent top executives and arrivals of new top executives are recorded as management changes. Samples of target firms are then constructed based on whether or not a firm had at least one top management change within two years (and one year) after the takeover. Other samples are also constructed using different definitions of management change, in particular, changes in CEOs and changes in CEOs excluding those CEOs replaced by an insider. Market model parameters are estimated using monthly stock returns from event months $-$108 through $-$49, where event month 0 is the month in which the tender offer is announced. Abnormal returns as well as industry-adjusted returns are cumulated for the samples over event months $-$48 through $-$1. T-tests indicate that the samples of target firms that had post-takeover management change had, on average, significantly lower stock returns than the sample of firms in the "no change" samples. The difference in returns is larger when considering changes within one year and when considering changes in CEO excluding insider replacement. A logistic regression confirms this analysis and indicates a positive, though generally insignificant, relationship between managerial opposition to takeover and post-takeover management change. However, target firms whose managers opposed takeover and were subsequently replaced had significantly lower pre-offer stock returns than target firms whose managers opposed and were not replaced. For targets in unsuccessful tender offers, no significant difference in pre-offer stock returns is observed between the "change" and "no change" samples.
Degree
Ph.D.
Advisors
McConnell, Purdue University.
Subject Area
Finance
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