Disclosure Regulation and Corporate Acquisitions

• Author: GAIZKA ORMAZABAL,PIETRO BONETTI,MIGUEL DURO
• Published date: 01 March 2020
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/1475-679X.12298

DOI: 10.1111/1475-679X.12298

Journal of Accounting Research

Vol. 58 No. 1 March 2020

Printed in U.S.A.

Disclosure Regulation and

Corporate Acquisitions

PIETRO BONETTI ,∗MIGUEL DURO ,∗

AND GAIZKA ORMAZABAL †

Received 13 November 2018; accepted 18 December 2019

ABSTRACT

This paper examines the effect of disclosure regulation on the takeover

market. We study the implementation of a recent European regulation that

imposes tighter disclosure requirements regarding the financial and owner-

ship information on public firms. We find a substantial drop in the number

∗IESE Business School †IESE Business School, CEPR, and ECGI.

Accepted by Philip Berger. We would like to thank an anonymous reviewer, Mireia Gine,

Ian Gow,Christian Leuz, Stefano Sacchetto, Laurence van Lent, Matthias Breuer, Max Mueller,

Max Muhn, Paul Healy, participants at the EAA 2018 annual meeting, and workshop partic-

ipants at Chinese University of Hong Kong, Hong Kong University of Science and Technol-

ogy, Frankfurt School of Finance and Management, IDC Herzliya University, I´

ESEG School

of Management, London Business School, London School of Economics, National Univer-

sity of Singapore, Singapore Management University, The University of Melbourne, Tilburg

University, University of Queensland, University of Technology Sydney, John Molson School

of Business, and WHU—Otto Beisheim School of Management for their useful comments

and suggestions. The paper has also benefited from the excellent research assistance of Eloy

Lanau, Donald N’Gatta, Vicent Peris, and Sergio Ribera. We benefited from conversations

with industry practitioners and regulators. We are indebted to Alvaro Villanueva (former

head of M&As at Caixabank), Pedro Arranz (former managing director of the Derivatives

& Structured Products Division at Ahorro Corporaci´

on), and the UK FSA FOIA team for

their technical support. Miguel Duro acknowledges financial assistance from research project

ECO2016-77579-1-P funded by the Spanish Ministry of Economics, Industry, and Competi-

tiveness. Gaizka Ormazabal acknowledges funding from the “C´

atedra de Direcci´

on de In-

stituciones Financieras y Gobierno Corporativo del Grupo Santander,” the BBVA Founda-

tion (2016 grant “Ayudas a Investigadores, Innovadores, y Creadores Culturales”), the Marie

Curie and Ramon y Cajal Fellowships, and the Spanish Ministry of Science and Innova-

tion (grant ECO2015-63711-P). An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

55

CUniversity of Chicago on behalf of the Accounting Research Center, 2020

56 P.BONETTI,M.DURO,AND G.ORMAZABAL

of control acquisitions after the implementation of the regulation, a decrease

that is concentrated in countries with more dynamic takeover markets. Con-

sistent with the idea that the disclosure requirements increased acquisition

costs, we also observe that, under the new disclosure regime, target (acquirer)

stock returns around the acquisition announcement are higher (lower), and

toeholds are substantially smaller. Overall, our evidence suggests that tighter

disclosure requirements can impose significant acquisition costs on bidders

and thus slow down takeover activity.

JEL codes: G34; G38; K22

Keywords disclosure regulation; takeover market; takeover laws; mergers

and acquisitions

1. Introduction

Disclosure regulation is often viewed as critical in promoting capital for-

mation and good functioning of capital markets. Consistent with this idea,

prior research documents substantial economic benefits of disclosure man-

dates (see Leuz and Wysocki [2016], for a review). However, recent theo-

retical literature points out that tightening disclosure rules has important

trade-offs; for example, more disclosure can crowd out private information

production, and destroy risk-sharing or trading opportunities (Goldstein

and Yang [2017]). Yet, there is scant empirical evidence on these trade-offs.

The trade-offs of disclosure regulation are especially pronounced and yet

barely studied in the case of the takeover market. Bidders invest on propri-

etary knowledge about the best use of the target resources, and conduct

takeovers as efficient means to appropriate the gains from this knowledge

(Jarrell and Bradley [1980]). Although an enhanced information environ-

ment could facilitate deals by providing bidders more precise information

about potential targets, tighter disclosure requirements on potential bid-

ders could freely provide to market participants the returns on this propri-

etary information, adding to the costs faced by potential bidders and thus

deterring some otherwise marginally profitable takeovers. In light of this

countervailing effect, this paper examines whether mandatory disclosure

can introduce costs that outweigh bidders’ benefits from transparency to

the point of slowing down takeover activity.

To address this question, we study the takeover market consequences

of a major regulatory development in the European Union: Directive

2004/109/EC, also known as “The Transparency Directive” (“TPD,” here-

after). This legislation was approved in 2004, implemented across EU coun-

tries at different points in time (between 2007 and 2009), and further ex-

tended in recent years. The TPD aims to provide greater transparency for

investors in European public firms by imposing disclosure requirements

on both issuers and shareholders. Importantly, the TPD tightened disclo-

sure rules regarding major ownership stakes, thereby imposing a cost on

potential acquirers. Disclosing an increase in ownership in the target firm

DISCLOSURE REGULATION AND CORPORATE ACQUISITIONS 57

signals that the acquirer may intend to take over the firm, and thus could

induce a defensive strategy from the managers of the target firm, attract

competing bidders, and make building a toehold stake in the target firm

more expensive.

Our setting offers unique empirical advantages. First, the TPD was in-

troduced separately from the rules governing the takeover process (i.e.,

Takeover Directive 2004/25/EC), and thus provides a clean setting to

study the effect of disclosure regulation on takeover activity. Second, as

European countries implemented the directive at different points in time

for relatively exogenous reasons, this setting helps address identification

challenges faced by prior research (Christensen, Hail, and Leuz [2016]).1

Third, the cross-country variation offered by our setting allows us to exam-

ine how the effect of disclosure regulation on takeover activity depends on

institutional features.

Beyond its empirical advantages, our setting is economically important.

The takeover market plays a crucial role in the economy by improving cap-

ital allocation, firm productivity, and aggregate productivity (Dimopoulos

and Sacchetto [2017]) and by curbing managerial entrenchment (Manne

[1965]). Moreover, a cross-country study of the effect of disclosure regu-

lation on the takeover market is especially relevant in the case of Europe,

given the ongoing effort to integrate the EU markets. The overall size of the

EU economy and takeover markets in particular also highlights the interest

of our research question.2

Our hypothesis that tightening ownership disclosure rules can slow

down takeover activity is grounded on the seminal work of Grossman

and Hart [1980a]. They show theoretically that mandatory disclosure of

ownership information can lower the expected return from acquisition

activity because the disclosure of ownership information forces the bidder

to reveal that she may intend to take over the target firm, providing to

market participants the possibility to free ride on the returns of this propri-

etary information. In our setting, the ownership disclosure requirements

introduced by the TPD could increase the cost (i.e., lower the expected

return) of a takeover for at least three reasons. First, the ownership

information released by the acquirer could alert managers of the target

firm about the potential takeover and prompt them to prepare a defense.

1The country-specific entry into force or implementation dates in each country result from

the requirement that member states implement EU-wide directives within a given period. The

timing of the implementation is mainly determined by the country’s legislative process.

2At the aggregate level, the EU economy is third in the world in terms of number and mar-

ket capitalization of public companies (see World Federation of Exchanges, 2018, available

at https://www.world-exchanges.org/our-work/statistics). The proportion of worldwide M&A

transactions during our sample period in the European Union and in the United States is

40% and 49% (in average market value, respectively) and 39% and 30% (in average number of

transactions, respectively), which suggests that the EU takeover market is comparable in size to

the U.S. takeover market (see data collected by the Institute for Mergers, Acquisitions and Al-

liances [IMAA], available at https://imaa-institute.org/mergers-and-acquisitions-statistics/).