Friday, January 7, 2011
More grist for the market for corporate control mill: Lel and Miller have a new paper "Does Takeover Activity Cause Managerial Discipline? Evidence From International M&A Laws".
Abstract: We examine the causal effects of the market for control on managerial discipline by using an exogenous source of variation in the threat of takeover caused by the initiation of M&A laws around the world. We find that the propensity to replace poorly performing CEOs increases following the enactment of M&A laws. Exploiting differences in legal protection and firm-level internal governance as a second source of variation to further ensure we identify the effects of takeover laws, we also document that this increased sensitivity of CEO turnover to performance is strongest in countries with weak investor protection and firms with no institutional ownership. Overall, our results suggest that an increase in the threat of takeover leads to better corporate governance outcomes.