Poor Industry Conditions as an External Disciplining Mechanism in Takeovers

Abstract

ABSTRACTResearch Question/IssueMany mergers destroy shareholder value because managers waste corporate resources to pursue private benefits. This paper considers poor conditions in the acquirer industry as a novel external disciplining mechanism that mitigates agency problems in takeovers.Research Findings/InsightsUsing textual analysis, we build a new measure of industry conditions based on acquirer peers' 10‐K statements. We link this measure to acquirer announcement abnormal returns and find that more negative industry conditions are associated with higher abnormal returns.Theoretical/Academic ImplicationsOur results suggest that poor industry conditions impose discipline on managers who then tend to focus on deals that create value for acquirer shareholders.Practitioner/Policy ImplicationsShareholders can rely on better alignment of interests with their managers during poorer industry conditions.