Value impact of debt issuances by targets of withdrawn takeovers |
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| Institution: | 1. Sam M. Walton College of Business, University of Arkansas, Business Building 302, Fayetteville, AR 72701, United States;2. Daniels College of Business, University of Denver, 2101 S. University Blvd., Denver, CO 80208, United States;1. Department of Bioengineering, Graduate School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan;2. Department of Chemistry and Biotechnology, Graduate School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan;3. Department of Molecular Pathology, Graduate School of Medicine, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan;1. Finance Department, 2317 SH/DH University of Pennsylvania, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, United States;2. Securities and Exchange Commission, 44 Montgomery Street, San Francisco, CA 94104, United States;3. Rutgers School of Business-Camden, Camden, NJ 08102, United States;4. The Brattle Group, 201 Mission Street, San Francisco, CA 94105, United States;1. Indiana University, Kelley School of Business, 1309 E 10th Street, Bloomington, IN 47405-1701, United States;2. Lehigh University, College of Business and Economics, 621 Taylor Street, Bethlehem, PA 18015, United States;1. Department of Finance and International Business, Fox School of Business, Temple University, Philadelphia, PA 19122, USA;2. School of Management, Tokyo University of Science, Simokiyoku 500, Kuki-shi, Saitama-ken 346-8512, Japan;3. ACAP Advisory Public Company Limited, 195 Empire Tower, 2-3, 22nd Fl., South Sathorn Road, Yannawa, Sathorn, Bangkok 10120, Thailand |
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| Abstract: | An existing finance theory predicts that managers of takeover targets will increase leverage to enhance managerial control which can, in turn, allow target managers to thwart a takeover attempt altogether. We find that targets significantly increase leverage, not only by issuing more debt, but also by repurchasing more equity. We also find that debt issuances by poorly performing target managers made between takeover announcement and withdrawal result in significantly negative abnormal returns at the time of the issuance, consistent with the entrenchment role of debt. On the other hand, debt issued by high-performing target managers is not found to result in these same negative returns. Additionally, we document that debt-increasing, poorly performing targets experience significantly more negative returns at withdrawal announcement, also followed by significantly negative post-withdrawal stock performance, while these negative effects are offset for high-performing targets. Overall, our findings suggest that managerial motivations to block takeover attempts with increased debt issuance differ and that these differences in motivation are recognized by the market. |
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