Does Takeover Activity Affect Stock Price Crash Risk? Evidence from International M&A Laws
63 Pages Posted: 26 Jan 2018 Last revised: 21 Aug 2020
Date Written: June 3, 2020
Abstract
We exploit the staggered initiation of merger and acquisition (M&A) laws across countries as a plausibly exogenous shock to the threat of takeover to examine whether the market for corporate control has a real effect on firm-level stock price crash risk. Using a difference-in-differences regression on a large sample of firms from 32 countries, we find that stock price crash risk significantly decreases following the passage of M&A laws. This effect is stronger for firms domiciled in countries with poorer investor protection and information environments and for firms with weaker firm-level governance. Further, financial reporting opacity and overinvestment significantly decrease in the post-M&A law periods. Our study suggests that an active takeover market has a disciplining effect on managerial bad news hoarding and leads to lower future crash risk.
Keywords: International M&A laws; Crash risk; Bad news hoarding; Financial reporting opacity; Overinvestment
JEL Classification: G10, G30, G34
Suggested Citation: Suggested Citation