Managerial Turnover and Leverage Under a Takeover Threat

Posted: 20 Oct 2003

See all articles by Walter Novaes

Walter Novaes

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Abstract

How do shareholders perceive managers who lever up under a takeover threat? Increasing leverage conveys good news if it reflects management's ability to enhance value. It conveys bad news, though, if inefficient managers are more pressured to lever up than the efficient ones. This paper demonstrates that negative updating may prevail. Managers who lever up to end a takeover threat may thus commit to enhance value and yet increase their chances of being replaced by their shareholders. The model provides implications for the dispersion of intraindustry leverage and for the stock price reaction to debt-for-equity exchanges.

Suggested Citation

Novaes, Walter, Managerial Turnover and Leverage Under a Takeover Threat. Available at SSRN: https://ssrn.com/abstract=369714

Walter Novaes (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

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