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Do M&A Lawsuits Discipline Managers' Investment Behavior?

Author

Listed:
  • Thomas Bourveau

    (HKUST - Hong Kong University of Science and Technology)

  • Francois Brochet
  • Sven Michael Spira

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using securities lawsuits related to M&A as an industry shock, we 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), we 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, we 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, our results show that M&A lawsuits can have an industry-wide deterrence effect on firms' suboptimal investment behavior.

Suggested Citation

  • Thomas Bourveau & Francois Brochet & Sven Michael Spira, 2014. "Do M&A Lawsuits Discipline Managers' Investment Behavior?," Working Papers hal-02018550, HAL.
    • Handle: RePEc:hal:wpaper:hal-02018550
    as

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