How Do Industry Peers Respond to Control Threats?

This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. The industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. They also adopt more takeover defe...

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Bibliographic Details
Published in:	Management science 2014-02, Vol.60 (2), p.380-399
Main Authors:	Servaes, Henri, Tamayo, Ane
Format:	Article
Language:	eng
Subjects:	agency costs Analysis Capital expenditures Capital investments Capital structure Cash Cash flow Cash flow forecasting Costs Financial leverage Financial services industries Forecasts and trends Free cash flow hostile takeover Hostile takeovers Hypotheses Industry investment decisions Investments Long term debt Management science P values Peers Rates of return Stock prices Stock returns Stockholders Studies Take-overs
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Summary:	This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. The industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. They also adopt more takeover defenses. The stock price reaction upon announcement of the takeover is positive and larger for peer firms with higher capital spending and higher free cash flows. Before the takeover attempt, the peer firms borrow less and invest more than predicted. Both stock returns and performance improve after the takeover attempt. These results are consistent with the argument that the control threat has important spillover effects for the other firms in the industry. This paper was accepted by Wei Xiong, finance.
ISSN:	0025-1909 1526-5501