University of Oxford
February 3, 1999
Nuffield College, University of Oxford, Working Paper No. 5
This paper undertakes an empirical analysis of the effects of the threat of takeover on company performance, based on a panel of 643 nonfinancial quoted UK companies over the period 1989-96. Our measure of the intensity of the threat of takeover is the predicted probability of takeover estimated recursively from a takeover likelihood model. This measure is used as an explanatory variable in models of total factor productivity, investment and dividends. We find that takeover risk has a positive and significant effect on subsequent productivity, a negative and significant effect on investment, and a positive but insignificant effect on current dividend payout. The probability of hostile takeover has little effect on productivity, but has a negative and significant effect on investment with a lag of two years, and a strongly positive effect on dividend payout. The probability of friendly takeover has similar effects to the aggregate takeover risk. These results are partially consistent with both a disciplinary view of takeovers and with a short-termism view.