Testing the inefficient management hypothesis: Are United Kingdom mergers and acquisitions disciplinary?

Abstract

A large body of research has examined the impact of takeovers on corporate performance. Although there has been a considerable volume of research on the wealth effects of takeovers to date, there has been very little evidence on the disciplinary role. The aim of this study is to contribute to the takeover debate by examining whether UK takeovers are disciplinary. The study replicates previous findings on whether the market for corporate control benefits firm managers or whether it is an avenue to maximise shareholder wealth. This study examines 153 UK takeover bids in the period 1990 to 1997. This period was chosen because it coincides with the publication of the Cadbury Report in 1992 when issues of corporate governance were raised and prescriptive recommendations were made to safeguard shareholder investment. In this study, results based on the evaluation of the share price suggest that targets of a takeover bid under-perform in the period prior to the bid. Accounting results also suggest that targets under-perform in the same period and this is consistent with the view that takeovers perform a disciplinary function when assets are reallocated to their most productive use. However, post bid share price performance shows modest improvement while accounting results suggest that managers of bidding firms fail to improve the operating performance of the combined firm. The findings of this study therefore dispel the notion that takeover bids are made in shareholders' interests. The results suggest that UK takeovers are not disciplinary, but are undertaken to generate short-term economic benefits to managers at the expense of shareholders.