The Impact of International Takeover Laws on Corporate Resource Adjustments: Evidence from the Asymmetric Behavior of Selling, General, and Administrative Costs

• In Event: Management, Etc.

Abstract

This study exploits the enactments of international M&A laws to investigate whether and how the takeover threat disciplines managerial decisions over corporate resource allocations. We hypothesize that the intensified pressure from the takeover market motivates managers to reduce unutilized SG&A resources in response to sales decrease, which leads to a lower level of SG&A cost asymmetry. Using a large sample of firms from 40 countries, we find that (1) SG&A cost asymmetry decreases significantly following the passage of takeover laws, (2) the decrease in cost asymmetry is concentrated in firms with a high probability of being targeted and those with high agency costs, and (3) the disciplinary effect of M&A law enactments is attributable to constraining managers’ empire building incentives rather than their quiet life preferences. Our evidence suggests that the takeover threat, as an external governance mechanism, induces managers to improve the operating efficiency in SG&A cost management.

Authors

• James N Cannon, Iowa State University

• Bingbing Hu, Hong Kong Baptist University

• Jay Junghun Lee, University of Massachusetts-Boston

• Daoguang Yang, Xiamen University