Do M&A Lawsuits Discipline Managers' Investment Behavior?

48 Pages Posted: 8 Oct 2014 Last revised: 24 Oct 2014

See all articles by Thomas Bourveau

Thomas Bourveau

HEC Paris - Accounting and Management Control Department

Francois Brochet

Boston University - Department of Accounting

Sven Michael Spira

HEC Paris - Finance Department

Date Written: June 4, 2014

Abstract

Using securities lawsuits related to M&A as an industry shock, we examine whether litigation risk acts as an external governance mechanism by disciplining managers' investment decisions. In the two years following an M&A lawsuit (a lawsuit where plaintiffs allege that the firm hid poor performance related to a prior acquisition), we find that industry peers experience higher bidder announcement returns, choose more adequate methods of payment, and engage in fewer diversifying and smaller takeovers. Collectively, this evidence is consistent with post lawsuit deals being of higher quality. Furthermore, we find that peer firms respond to the increased litigation risk by reducing abnormally high investment expenditures. Finally, the reactions are stronger among firms with fewer anti-takeover provisions. Overall, our results show that M&A lawsuits can have an industry-wide deterrence effect on firms' suboptimal investment behavior.

Keywords: Litigation Risk, Mergers, Investment Decisions, Corporate Governance

Suggested Citation

Bourveau, Thomas and Brochet, Francois and Spira, Sven Michael, Do M&A Lawsuits Discipline Managers' Investment Behavior? (June 4, 2014). HEC Paris Research Paper No. ACC-2014-1062, Available at SSRN: https://ssrn.com/abstract=2506516 or http://dx.doi.org/10.2139/ssrn.2506516

Thomas Bourveau (Contact Author)

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France

Francois Brochet

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Sven Michael Spira

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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