The market for corporate control and risk-taking: Evidence from Global Merger and Acquisition Laws

We examine the effect of international regulations governing the market for corporate control (MCC) on firm risk-taking using the staggered enactment of country-level merger and acquisition (M&A) laws of 34 countries. Consistent with the theoretical argument of deterrence, we show that the MCC leads to unintended consequences by discouraging value-relevant corporate risk-taking. Our investigation of real earnings management suggests that the MCC induces real earnings smoothing and also provides evidence of short-termism. This reduction in corporate risk-taking is associated with a decrease in real investments, an increase in cash-holding, an increase in debt employment, and a propensity to diversify in M&A. Further examination of the heterogeneous effect of the quality of national governance institutions on the relationship between the MCC and risk-taking shows that the country-level investor protection and transparency levels positively moderate the effect of the MCC. Our study highlights that there could be complementary roles played by national institutional features and the MCC in encouraging value-relevant corporate risk-taking.