Threat of hostile takeover and the cost of seasoned equity offerings

Sheikhbahaei, Ali and Shams, Syed (2020) Threat of hostile takeover and the cost of seasoned equity offerings. International Journal of Managerial Finance. ISSN 1743-9132


Abstract

Purpose – This paper investigates the relationship between a firm’s susceptibility to a hostile takeover and investors’ reactions to a seasoned equity offering (SEO).

Design/methodology/approach – The study applies ordinary least squares (OLS) with fixed effects regression analyses to a sample of 2,517 observations from US listed companies. Event study methodology was employed to capture market reactions to the announcement of newly issued stocks. To achieve cross-sectional analyses, time variations in takeover laws allowed us to perform the desired tests across two decades of data.

Findings – The results suggest that investors react positively to the announcement of an equity offering when the threat of hostile takeover is higher. The magnitude of positive stock market reactions varies over two decades due to time series variations in takeover laws. Furthermore, the findings show that a higher hostile takeover index (HTI) score reduces investors’ concerns about the inefficient usage of proceeds in acquisitions.

Practical implications – The results demonstrate that the corporate takeover legal environment provides an important external governance mechanism through which investors’ confidence increases during an SEO event. The study’s empirical evidence implies that the extent of external disciplinary mechanism plays a significant role in reducing investors’ uncertainty about the misuse of raised capital.

Originality/value – The exogenous fast-evolving legal environment surrounding the takeover market in the United Status allowed our study to bypass the endogeneity concerns in measuring governance strength. From the review of prior literature, this paper appears to be the first to use HTI scores to examine investors’reactions to a corporate announcement.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Faculty/School / Institute/Centre: Historic - Faculty of Business, Education, Law and Arts - School of Commerce (1 Jul 2013 - 17 Jan 2021)
Faculty/School / Institute/Centre: Historic - Faculty of Business, Education, Law and Arts - School of Commerce (1 Jul 2013 - 17 Jan 2021)
Date Deposited: 02 Feb 2021 23:44
Last Modified: 10 Feb 2021 05:59
Uncontrolled Keywords: seasoned equity offering, corporate governance, hostile takeover index
Fields of Research (2008): 15 Commerce, Management, Tourism and Services > 1501 Accounting, Auditing and Accountability > 150103 Financial Accounting
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150299 Banking, Finance and Investment not elsewhere classified
Fields of Research (2020): 38 ECONOMICS > 3801 Applied economics > 380101 Agricultural economics
38 ECONOMICS > 3801 Applied economics > 380107 Financial economics
Identification Number or DOI: https://doi.org/10.1108/IJMF-03-2020-0106
URI: http://eprints.usq.edu.au/id/eprint/41081

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