Shareholder investment horizons and the market for corporate control |
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Institution: | 1. School of Business, University of Connecticut, 2100 Hillside Road, Unit 1041, Storrs, CT 06269, United States;2. Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551, United States;1. University of Hamburg, 20148 Hamburg, Germany;2. University of Alberta, Edmonton, AB T6C 4G9, Canada;3. University of South Carolina, Columbia, SC 29208, USA;1. Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, United States;2. Rutgers Business School, Piscataway, NJ 08854, United States;1. Nanyang Business School, Nanyang Technological University, Singapore;2. Institute of Accounting and Finance, School of Accountancy, Shanghai University of Finance and Economics, China;3. Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China |
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Abstract: | This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns. |
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