Les Cahiers de Recherche - HEC Paris
Do M&A Lawsuits Discipline Managers' Investment Behavior?
() and Sven Spira
Abstract: Using securities lawsuits related to M&A as an industry
shock, the authors 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), they 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, the authors 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, their 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; (follow links to similar papers)
48 pages, June 4, 2014
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