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Threat of hostile takeover and the cost of seasoned equity offerings

Ali Sheikhbahaei (Department of Banking and Finance, Monash Business School, Monash University, Melbourne, Australia)
Syed Shams (Department of Finance, School of Commerce, University of Southern Queensland, Toowoomba, Australia)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 2 February 2021

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.

Keywords

Acknowledgements

We are grateful to two anonymous reviewers for their valuable comments and feedback.

Citation

Sheikhbahaei, A. and Shams, S. (2021), "Threat of hostile takeover and the cost of seasoned equity offerings", International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-03-2020-0106

Publisher

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Emerald Publishing Limited

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