The market for corporate control and dividend policies: Cross-country evidence from M&A laws

Abstract

This article examines the association between the market for corporate control and firm dividend policies. Specifically, we examine changes in firms’ dividend payouts following a plausibly exogenous shock to the threat of takeover with the staggered initiation of country-level merger and acquisition (M&A) laws. Using a global sample of firms across 34 countries, we find that both the likelihood and the amount of dividends decrease significantly after the initiation of an M&A law in a country. Our cross-sectional analyses indicate that the negative effect of M&A laws on dividend payouts is amplified in countries where the institutional environment enables M&A laws to improve the takeover market and for firms that could readily use internal capital to finance growth opportunities. Moreover, this negative effect is attenuated for firms with already sufficient monitoring of managers. These findings suggest that the enactment of M&A laws, by strengthening the market for corporate control, lowered the need for firms to convey their commitment to shareholders’ interests through costly dividend payments, especially when the threat of takeover prompted by M&A laws is likely to serve as an effective disciplinary mechanism.

Résumé

Cet article étudie l’association entre le marché du rachat des entreprises et les politiques de dividendes des firmes. Plus précisément, nous examinons les changements dans les versements de dividendes des entreprises suite à un plausible choc exogène lié à la menace d’un rachat avec un lancement décalé de lois concernant les fusions et acquisitions (FA) au niveau d’un pays. Utilisant un échantillon mondial d’entreprises de 34 pays, nous constatons que la probabilité et le montant des dividendes diminuent de façon significative après le lancement dans un pays d’une loi sur les FA. Nos analyses transversales indiquent que l’effet négatif des lois relatives aux FA sur le versement de dividendes est amplifié dans les pays où l’environnement institutionnel permet les lois sur les FA pour améliorer le marché de rachat et pour les entreprises qui pourraient facilement utiliser du capital interne pour financer des opportunités de croissance. De plus, cet effet négatif est atténué pour les entreprises ayant déjà une surveillance suffisante des dirigeants. Ces résultats suggèrent que la promulgation de lois sur les FA, en renforçant le marché du rachat des entreprises, réduit la nécessité pour les entreprises de transmettre leur engagement envers les intérêts des actionnaires par le biais de paiements coûteux de dividendes, surtout quand la menace d’une prise de contrôle provoquée par les lois sur les FA est susceptible d’être utilisée comme un mécanisme disciplinaire efficace.

Resumen

Este artigo examina a associação entre o mercado para controle corporativo e políticas de dividendos da firma. Especificamente, nós examinamos as mudanças na distribuição de dividendos das empresas após um plausível choque exógeno a ponto de ameaçar a tomada de controle e a criação escalonada de leis sobre fusões e aquisições (M & A) no nível do país. Usando uma amostra global de firmas de 34 países, descobrimos que tanto a probabilidade quanto o montante dos dividendos diminuem significativamente após o início de uma lei sobre M & A em um país. Nossas análises transversais indicam que o efeito negativo de leis de M & A na distribuição de dividendos é amplificado em países onde o ambiente institucional viabiliza leis de M & A que aprimoram o mercado de aquisições, e para empresas que poderiam facilmente usar seu capital interno para financiar oportunidades de crescimento. Além disso, esse efeito negativo é atenuado para empresas com suficiente monitoramento de gerentes. Esses achados sugerem que a promulgação de leis de M & A por meio do fortalecimento do mercado para o controle corporativo reduziu a necessidade das empresas para transmitir seu compromisso com os interesses dos acionistas por meio do pagamento de elevados dividendos, especialmente quando a ameaça de tomaa de controle gerada por leis de M & A é passível de servir como um eficaz mecanismo disciplinador.

Resumo

Este artículo examina la asociación entre el mercado de control corporativo y las políticas de dividendos de la empresa. Específicamente, examinamos cambios en el pago dividendos en empresas después de un probable choque exógeno que amenace una toma de control con un comienzo escalonado de leyes de fusión y adquisición (M&A) a nivel país. Usando una muestra global de empresas en 34 países, encontramos que tanto la probabilidad como la cantidad de dividendos disminuyen significativamente después que empieza una ley de fusiones y adquisiciones en un país. Nuestros análisis transversales indican que el efecto negativo de las leyes de fusiones y adquisiciones en el pago de dividendos crece en los países donde el entorno institucional permite leyes de fusiones y adquisiciones para mejorar el mercado de adquisiciones y para las empresas que podrían usar fácilmente capital interno para financiar las oportunidades de crecimiento. Adicionalmente, este efecto negativo es atenuado para las empresas que ya tienen un monitoreo suficiente de gerentes. Estos hallazgos sugieren que la promulgación de leyes de fusiones y adquisiciones, mediante el fortalecimiento del mercado de control corporativo, bajó la necesidad de las empresas de llevar sus compromisos a los intereses de los accionistas mediante pagos costosos de dividendos, especialmente cuando la amenaza de tomar control es inducida por leyes de fusiones y adquisiciones es probable que sirva como un mecanismo disciplinario efectivo.

概要

本文探讨了市场的公司控制与公司分红政策的联系。具体来说,我们研究了随着国家层面并购(M&A)法律的交错启动,对并购威胁的似而非的外生冲击引起的公司分红派息的变化。采用跨越34个国家的企业全球样本,我们发现分红的可能性和数额随着M&A法律在一个国家的启动而显著降低。我们的横断面分析表明,并购法律对分红派息的负面影响在制度环境能使并购法律改善收购市场的国家以及容易用内部资金融资增长机会的公司被放大。而且,这种负面影响在对经理人有足够监控的公司被减弱。这些结果表明,M&A法律的制定,通过加强市场的公司控制,降低了企业通过昂贵的分红派息传递它们对股东利益承诺的需要,特别是当由M&A法律带来的并购威胁可能会作为一种有效的约束机制的时候。

Appendices

Appendix A

Provisions of M&A Laws

• 1. Limitations to the use of anti-takeover tactics Many M&A laws inhibit actions that frustrate a takeover offer, or enumerate specific bans on corporate anti-takeover tactics, allowing them only with general shareholder approval (as in Malaysia). For example, while defensive measures such as poison pills or staggered boards are widespread and generally accepted in the United States, they are prohibited in most countries outside of the US (e.g., Austria). Even in the case where certain takeover defenses are permitted by the M&A laws, the laws impose stringent conditions under which defensives measures can be deployed by the management or the board. To the extent there are investor or board restrictions on management’s use of anti-takeover devices, (hostile) takeover activity should increase following the enactment of M&A laws (Goergen, Martynova, & Renneboog, 2005).

• 2. Squeeze-out rules Squeeze-out options are another important provision often included in M&A laws. These options allow the bidder to force minority shareholders to cash-out after reaching a specified control level (e.g., 95% in Germany). While the squeeze-out price must be adequate, it can be lower than the tender offer price. Squeeze-out rules allow a bidder to gain 100% control by circumventing holdouts by minority shareholders (Grossman & Hart, 1980; Yarrow, 1985) and would lead to a decrease in the tender price and consequently increase takeover activity (Goergen et al., 2005).

• 3. Mandatory bid rules A mandatory bid rule typically requires the bidder, after reaching some control threshold (e.g., 30% in Germany and 33% in Malaysia), to offer all minority shareholders a share price not lower than the average price during the months leading up to the bid. The purpose of mandatory bid rules is to offer minority shareholders a fair exit and to prevent value-decreasing changes of control—if a change of control takes place, then all parties gain, including minority shareholders (Goergen et al., 2005; Berglöf & Burkart, 2003). However, mandatory bid rules may also decrease the likelihood of a value-increasing control transfer because they force bidders to pay the control premium to minority shareholders, which inflates the purchase price and discourages bidders (Goergen et al., 2005; Berglöf & Burkart, 2003).

• 4. Disclosure thresholds Takeover laws also establish disclosure thresholds where the bidder’s intent to control becomes known after accumulating a certain percentage of voting rights (e.g., 15% in India). While these sort of disclosure rules protect investors from selling their shares too early and forgoing the takeover premium, strict disclosure standards impede the ability of the bidder to secretly acquire initial stakes in the target firm, which is often an important source of the bidder’s profits. Thus more strict disclosures by the bidder could potentially increase the cost of takeover (Berglöf & Burkart, 2003).

• 5. Reduced transaction costs M&A laws also seek to reduce transaction costs associated with mergers. For example, some M&A laws provide tax benefits to alleviate the transaction cost associated with M&A transactions, increasing the overall takeover gains accrued to the bidder and thus making M&As more attractive to potential bidders. Taiwan’s 2002 M&A act, for example, eliminated certain transaction taxes, such as securities transaction tax, stamp duty, VAT, and land value incremental tax in an acquisition where at least 65% of the consideration is paid by voting stock.

Appendix B

Table B1 Variable definitions