The Market for Corporate Control and Risk‐taking: Evidence from Global Merger and Acquisition Laws
| Published date | 01 April 2023 |
| Author | Santosh Koirala,Sandeep Rao,Hisham Farag,Andrew Marshall |
| Date | 01 April 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12625 |
British Journal of Management, Vol. 34, 997–1022 (2023)
DOI: 10.1111/1467-8551.12625
The Market for Corporate Control and
Risk-taking: Evidence from Global Merger
and Acquisition Laws
Santosh Koirala,1Sandeep Rao,2Hisham Farag1and Andrew Marshall3
1Department of Finance, University of Birmingham, Birmingham, B15 2TT, UK, 2DCU Business School,
Dublin City University, Dublin 09, Ireland, and 3Department of Accounting and Finance, University of
Strathclyde, Glasgow, G4 0QU,UK
Corresponding author email: a.marshall@strath.ac.uk
We examine the effect of international regulations governing the market for corporate
control (MCC) on rm risk-taking using the staggered enactment of country-level merger
and acquisition (M&A) laws of 34 countries. Consistent with the theoretical argument
of deterrence, we show that the MCC leads to unintended consequences by discouraging
value-relevantcorporate risk-taking. Our investigation of real earnings management sug-
gests that the MCC induces real earnings smoothing and also provides evidence of short-
termism. This reduction in corporate risk-taking is associated with a decrease in real
investments, an increase in cash-holding, an increase in debt employment, and a propen-
sity to diversify in M&A. Further examination of the heterogeneous effect of the quality
of national governance institutions on the relationship between the MCC and risk-taking
shows that the country-level investorprotection and transparency levels positively moder-
ate the effect of the MCC. Our study highlights that there could be complementary roles
played by national institutional featuresand the MCC in encouragingvalue-relevant cor-
porate risk-taking.
Introduction
As rm risk-taking is an important driver of pri-
vate sector growthof an economy (John,Litov and
Yeung, 2008; Faccio, Marchica and Mura, 2011),
the impact of regulations governing the market for
corporate control (MCC, henceforth) on corpo-
rate risk-taking behaviour remains a central reg-
ulatory policy issue. The concern of the regulators
stems from the possibility thatthe MCC could lead
to corporate short-termism that may undermine
the long-term intended policy outcomes (OECD,
2015). This issue is also connected to the unre-
solved academic debateon the (un)intended conse-
quence of international corporate governance laws
on corporate nance decisions (Lel and Miller,
2015; Glendening, Khurana and Wang,2016; Fau-
ver et al., 2017). This paper exploits an inter-
national setup of the staggered introduction of
merger and acquisition (M&A) laws in 34 coun-
tries as a plausibly exogenous variation in the
MCC to explore the link between the MCC and
rm risk-taking.
In the takeover market, alternative management
teams contest for the rights to manage corpo-
rate resources, which increases the likelihood of
underperforming incumbent managers being re-
placed (Lel and Miller, 2015, Glendening, Khu-
rana and Wang,2016). Therefore, the MCC should
create pressure for corporate managers to per-
form .1In the absence of predictable laws and reg-
ulation around mergers and acquisitions (M&A),
the MCC in a target domicile would remain
1Previous studies show that in manycountries the corpo-
rate takeovermarket was largely unregulated or came un-
der the jurisdiction of national stock exchanges before the
takeover law enactment (Glendening et al., 2016).
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British Academy
of Management.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs Li-
cense, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-
commercial and no modications or adaptations are made.
998 Koirala et al.
suppressed as the acquirer would be less willing
to be involved in the M&A activity until there is
more certainty in the M&A rules applicablein that
market (Glendening, Khurana and Wang, 2016).
By establishing an unambiguous regulatoryframe-
work for M&A, the enactment of M&A laws low-
ers regulatory uncertainty among market partici-
pants and therefore should boost M&A activity.
Taken together, these arguments suggest that the
enactment of M&A laws improves the MCC.
There are differing views on how improvements
in the MCC impact corporate risk-taking be-
haviour. The deterrence view posits that increased
takeover threats could lead to managerial myopia
(Zhao et al., 2012). This could lead to lower risk-
taking of rms towards long-term investments
(Hayes and Abernathy, 2007; Ladika and Saut-
ner, 2020; Keum, 2021).2Alternatively, the MCC
as a corporate disciplining tool improvescorporate
risk-taking through improvedmonitoring of man-
agerial performance and their propensity to over-
invest (John, Litov and Yeung, 2008; Fauver et al.,
2017; Lu and Wang, 2018; Balachandran et al.,
2020).3
Takinginto account these differing views, we ex-
amine the impact of international M&A laws (that
increase takeoverthreats) as a source of exogenous
variation in the MCC on corporate risk-taking be-
haviour. Our review of the literature suggests that
M&A law enactment in various countries is driven
mainly by the regulators’ concern to lower uncer-
tainty around M&As and is exogenous to corpo-
rate risk-taking attributes (Lel and Miller, 2015;
Glendening, Khurana and Wang,2016). Our diag-
nostic tests further endorse this assertion that these
lawsare not endogenously affected by factors relat-
ing to corporate risk-taking.
Exploiting international M&A laws from 1993
to 2005 in a DiD (difference-in-differences) set-up,
we investigate the impact of regulations govern-
ing the MCC on corporate risk-taking. We nd
2For brevity, henceforth, unless specied, risk-taking
means ‘value-enhancing risk-taking’ as opposed to ‘value-
destroying risk-raking’.
3There is a possibility that decrease in corporate invest-
ment is associated with reduction of overinvestment due
to managerial discipline (Hope and Thomas, 2008; Bal-
achandran et al., 2020). Overinvestment is an agency
problem wherean agent-manager indulge in decisions like
aggressively growing the rm by undertaking inefcient
projects that reduce rm long-term performance and is
value-destroying.
that rms in countries where there has been M&A
law enactment (treated rms, henceforth) reduce
their corporate risk-taking in the post-enactment
period. This result is robust to different measures
of corporate risk-taking, including forward earn-
ings volatility as an operational risk measure, cap-
ital expenditure as a measure of real investment
risk, and idiosyncratic volatility as a market-based
measure. In terms of economic magnitude, the
MCC is associated with a reduction of 6.85% of
forward earnings volatility, a 21.37% reduction in
capital expenditure, and a 1.6% reduction in id-
iosyncratic volatility. This reduction in corporate
risk-taking supports the view that the MCC deters
corporate risk-taking. We concurrently test the ef-
fect of the MCC on rm value (Tobin’s Q). In line
with the deterrence argument of corporate risk-
taking, the results show that the MCCis negatively
associated with the rm value (14.1% reduction
in Tobin’s Q). Our ndings show that short-term
performance pressures created by the MCC could
have the unintended consequences of discourag-
ing value-relevant corporate risk-taking, thus re-
ducing rm value.4,5
Wemaintain that MCC-driven reduction in cor-
porate risk-taking manifests mainly in the form of
investment conservatism. However, a reduction in
real investment (capital expenditure) may not nec-
essarily imply a lowering of value-relevant risk-
taking but could suggest a disciplining of manage-
rial indulgence to overinvest in value-destroying
projects (Khurana and Wang, 2019). To address
this issue, we rst examine the impact of the MCC
on risk-taking for a sub-sample of rms where
4This argument is consistent with the nding that value-
destroying corporate activities follow increased creditor
protection (Acharya et al., 2011).
5Our results on the heterogeneous rm and country char-
acteristics (as reported in Appendix table A1) show this
deterrence effect on corporate risk-taking is more pro-
nounced in small rms, rms with low tangibility, and
growingr ms.We also nd rms located in countries with
higher purchasing power reduce risk-taking followingthe
MCC enactment, compared to the rms residing in coun-
tries with lower purchasing power. In contrast, rms in
countries with higher economic growth mitigate, in part,
the negative impact of MCC on corporate risk-taking. If
economic growth and purchasing power are inversely re-
lated, these results suggest that a part of corporate con-
servatismresulting from the MCC is eliminated by growth
prospects facing rms, and therefore economic growth
and not credit marketdevelopment seems to motivate cor-
porate risk-taking (King and Levine, 1993).
© 2022 The Authors.British Journal of Management published by JohnWiley & Sons Ltd on behalf of British
Academy of Management.
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