The Market for Corporate Control and Stock Price Crash Risk, Revisited

We revisit the research question centering around the impact of the market for corporate control on stock price crash risk. Using a newly-developed takeover index from Cain, McKeon, and Solomon (2017) that comprehensively considers existing state takeover laws, federal statutes, and state court standards of review along with a list of firm-specific and economic variables, we find an increase in takeover susceptibility reduces firms’ future stock price crash risk. Such evidence help reconcile contradicting findings in prior cross-country and U.S.-based studies, confirming the importance of considering existing takeover provisions when studying any single anti-takeover law on a firm’s takeover protection. External takeover susceptibility reduces crash risk by curtailing managerial empire-building motives and constraining the usage of manipulative accounting techniques to withhold bad news. Overall, our findings confirm that the market for corporate control is an effective governance mechanism in reducing information-hoarding-related agency problems