TY - JOUR
T1 - Does the market for corporate control influence executive risk-taking incentives? Evidence from takeover vulnerability
AU - Ongsakul, Viput
AU - Chatjuthamard, Pattanaporn
AU - Jiraporn, Napatsorn
AU - Jiraporn, Pornsit
N1 - Funding Information:
This research was funded by the Chulalongkorn University under the Ratchadapisek Sompoch Endowment Fund (2020) through the Collaborating Center for Labor Research at Chulalongkorn University (CU-Collar) (763008) and the Center of Excellence in Management Research for Corporate Governance and Behavioral Finance. Part of this research was carried out while Pornsit Jiraporn served as Visiting Professor of Finance at SASIN School of Management, Chulalongkorn University, in Bangkok, Thailand.
Publisher Copyright:
© 2020, Emerald Publishing Limited.
PY - 2021/1/23
Y1 - 2021/1/23
N2 - Purpose: This study aims to investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend to be risk-averse as they are more exposed to idiosyncratic risk, resulting in sub-optimal risk-taking that does not maximize shareholders’ wealth. The takeover market alleviates this problem, inducing managers to take more risk. Therefore, risk-taking incentives inside the firm are less powerful when the outside takeover market is more active. Design/methodology/approach: Exploiting a novel measure of takeover vulnerability recently constructed by Cain et al. (2017), the authors explore how takeover vulnerability influences executive risk-taking incentives. Using a large sample of US firms, the authors use fixed-effects regressions, propensity score matching and instrumental variable analysis. Findings: Consistent with this study’s hypothesis, a more active takeover market results in less powerful risk-taking incentives. Specifically, a rise in takeover vulnerability by one standard deviation diminishes executive risk-taking incentives by 22.39%, which is an economically meaningful magnitude. Originality/value: To the best of the authors’ knowledge, this study is the first to explore the effect of the takeover market on managerial risk-taking incentives, using a novel measure of takeover susceptibility. The authors’ measure of takeover vulnerability is considerably less susceptible to endogeneity, enabling the authors to draw causal inferences with more confidence.
AB - Purpose: This study aims to investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend to be risk-averse as they are more exposed to idiosyncratic risk, resulting in sub-optimal risk-taking that does not maximize shareholders’ wealth. The takeover market alleviates this problem, inducing managers to take more risk. Therefore, risk-taking incentives inside the firm are less powerful when the outside takeover market is more active. Design/methodology/approach: Exploiting a novel measure of takeover vulnerability recently constructed by Cain et al. (2017), the authors explore how takeover vulnerability influences executive risk-taking incentives. Using a large sample of US firms, the authors use fixed-effects regressions, propensity score matching and instrumental variable analysis. Findings: Consistent with this study’s hypothesis, a more active takeover market results in less powerful risk-taking incentives. Specifically, a rise in takeover vulnerability by one standard deviation diminishes executive risk-taking incentives by 22.39%, which is an economically meaningful magnitude. Originality/value: To the best of the authors’ knowledge, this study is the first to explore the effect of the takeover market on managerial risk-taking incentives, using a novel measure of takeover susceptibility. The authors’ measure of takeover vulnerability is considerably less susceptible to endogeneity, enabling the authors to draw causal inferences with more confidence.
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U2 - 10.1108/CG-03-2020-0106
DO - 10.1108/CG-03-2020-0106
M3 - Article
AN - SCOPUS:85095937307
SN - 1472-0701
VL - 21
SP - 62
EP - 77
JO - Corporate Governance (Bingley)
JF - Corporate Governance (Bingley)
IS - 1
ER -