Discipline or disruption? Stakeholder relationships and the effect of takeover threat

Although a sizable literature suggests that firms benefit from vulnerability to takeovers because it reduces agency problems, the threat of takeovers can also impose ex ante costs on firms by adversely affecting relationships with important stakeholders, such as major customers. We find that when firms have corporate customers as important stakeholders, an exogenous reduction in the threat of takeovers increases their ability to attract new customers and strengthens their relationships with existing customers, resulting in improvement in operating performance. The positive effect on operating performance is greater for suppliers that are likely to offer unique and durable products to their customers. Our results suggest a beneficial aspect of protection from takeovers when stakeholder relationships are important. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2252. Keywords: takeovers; corporate governance; product market relationships; business combination laws History: Received December 14, 2013; accepted April 25, 2015, by Wei Jiang, finance. Published online in Articles in Advance December 7, 2015.
1. Introduction An extensive literature suggests that an active takeover market is an important mechanism for reducing managerial slack and improving firm performance (e.g., Grossman and Hart 1980, Jensen 1986, [...]