Disciplinary Corporate Takeovers: Evidence for Australia

Abstract

This paper tests the relationship between takeovers and poor management performance, known as the market discipline hypothesis. We create a proprietary new Australian dataset for this study by individually researching company reports for executive retention data. We assess takeover targets for pre-bid managerial inefficiency and find evidence that Australian target companies exhibit negative abnormal returns prior to takeover. In particular, we find that disciplinary targets underperform their non-disciplinary counterparts. Our tests take into account the difference between friendly and hostile takeovers, and the industry sector in which the target firm operates.