Recent studies suggest that greater exposure to the market for corporate control
matters for managers and shareholders since it affects firms’ ex-post risk of experiencing
a stock price crash. The findings though question the direction of the effect. In contrast,
in this study, we are the first to examine the effects of firms’ ex-ante ...
Recent studies suggest that greater exposure to the market for corporate control
matters for managers and shareholders since it affects firms’ ex-post risk of experiencing
a stock price crash. The findings though question the direction of the effect. In contrast,
in this study, we are the first to examine the effects of firms’ ex-ante risk of experiencing a stock price crash, a likely antecedent of which is managers’ concealment of news
on aspects of the market for corporate control. We find that higher crash risk leads to
greater takeover target likelihood. This relationship, which is robust to duly circumventing reverse causality, depends to a significant extent on inferior managerial quality and
greater managerial discretion around financial accruals, affording richer insight into the
notion that correction of managerial behaviour is a stimulus for the market for corporate
control, but one that depends on the likely extent of managers’ concealment of news. We
also concurrently find that actual takeover targets with higher crash risk generate a lower
bid premium and receive more payment with stock. Overall, our findings strongly suggest
that decision-making in the market for corporate control is at least partially explained
by incentives linked to opportunistic prices and takeovers of lemons.