The Market for Corporate Control and Stock Price Crash Risk, Revisited

We revisit the research question centering around the impact of the market for corporate control on stock price crash risk. Using a newly-developed takeover index from Cain, McKeon, and Solomon (2017) that comprehensively considers existing state takeover laws, federal statutes, and state court standards of review along with a list of firm-specific and economic variables, we find external takeover susceptibility reduces firms’ future stock price crash risk. This evidence is consistent with a recent cross-country study but contradicts another U.S.-based study, confirming the importance of considering existing takeover provisions when studying any single anti-takeover law on a firm’s takeover protection. Our results are robust to alternative measures of stock price crash risk and address multiple critiques of prior studies on takeover susceptibility. Our analysis further suggests that external takeover susceptibility reduces crash risk by constraining a CEO’s use of manipulative accounting techniques to hide bad news. Overall, our findings confirm that the market for corporate control is an effective governance mechanism in reducing information-hoarding related agency problems.