The Takeover Market’s Effect on Managerial Ownership : Evidence From Hostile Takeover Susceptibility

Purpose: Capitalizing on a unique measure of takeover susceptibility principally based on the staggered implementation of state laws, we explore the takeover market’s effect on managerial ownership. The market for corporate control, often known as the takeover market, is an important external governance mechanism, whereas managerial ownership is a vital internal governance instrument. Managerial ownership brings into convergence the interests of shareholders and managers. The originality of our study arises from the usage of state-level anti-takeover legislations as a measure which is beyond the control of firms and plausibly exogenous to firm-specific characteristics.Design/Methodology: In addition to the standard regression analysis, we also execute a variety of robustness checks to minimize endogeneity, i.e., propensity score matching, entropy balancing, instrumental-variable analysis, Lewbel’s (2012) heteroscedastic identification, and Oster’s (2019) testing for coefficient stability. Findings: Based on a large sample of U.S. firms, our results show that more hostile takeover threats bring about significantly lower managerial ownership. Our results reinforce the prediction of the substitution hypothesis. The disciplinary function of the takeover market reduces agency conflict to the point where managerial ownership is less necessary as a governance mechanism. Specifically, a rise in takeover susceptibility by one standard deviation diminishes managerial ownership by 7.22%Originality: Our study is the first to shed light on the impact of the takeover market on managerial ownership using a novel measure mainly based on the staggered adoption of state laws, which are plausibly exogenous to individual firms’ characteristics. Consequently, unlike prior research, our study is more likely to indicate a causal effect, rather than merely a correlation