Firm Disclosure Response to Takeover Threat: Testing the Corporate Control Contest Hypothesis

• In Event: Voluntary Disclosure - Determinants and Effects

Abstract

We test the corporate control contest hypothesis which predicts that managers use voluntary disclosure to reduce the likelihood of job loss when faced with control threats. We exploit the exogenous control shock experienced by firms upon the hostile takeover announcements of rival firms in the same industry, and perform difference-in-difference analyses to test shocked firms’ disclosure reaction relative to control firms. We find that, after the control shock, treatment firm managers provide more forecasts and issue more 8-Ks and the expanded disclosure contains more bad news. In addition, the expanded disclosure is of a higher precision as evidenced by managers’ conference call language that is easier to understand and that contains less obfuscation component. Treatment firms also provide more quantitative but not qualitative earnings forecasts, and their 10-Ks contain fewer uncertainty words. Taken together, our combined results are consistent with treatment firms expanding voluntary disclosure and increasing the transparency of the associated disclosure in response to the control shock. Our study contributes to the voluntary disclosure literature by providing much needed causal evidence supporting, and extending, the corporate control contest hypothesis.

Authors

• Shuping Chen, University of Texas at Austin

• Bin Miao, Hong Kong Polytechnic University

• Kristen Valentine, University of Texas at Austin