International M&A Laws, the Market for Corporate Control and Risk-taking

In this study, we examine the effect of the market for corporate control (MCC) on firm risk-taking exploiting the staggered enactment of country-level merger and acquisition (M&A) laws of thirty-four countries as a plausibly exogenous source of variation in MCC. Consistent with the theoretical argument of temporal traps, our empirical study shows that MCC brings unintended consequences by discouraging value-relevant corporate risk-taking. Further examination of the heterogeneous effect of enabling institutions, our investigation reveals that country-level investor protection and transparency environment positively moderates the effect of MCC. Our study highlights the complementary role played by institutions to translate the effect of MCC towards discouraging value-destroying investment conservatism.