Exploiting two novel measures of innovation efficiency and takeover vulnerability, we explore the effect of the takeover market on corporate innovation. Our results reveal that a more active takeover market stifles innovation considerably, consistent with the notion that managers tend to be myopic when more exposed to hostile takeover threats, making investments that produce results in the short run at the expense of long-term projects that lead to more innovation. Additional robustness checks confirm the results, including fixed-effects and random-effects regressions, propensity score matching, GMM dynamic panel data analysis and instrumental-variable analysis. Our results are unlikely driven by endogeneity.
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