Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm’s institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher longrun underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders see front matter r 2004 Elsevier B.V. All rights reserved. .jfineco.2004.10.002 k an anonymous referee, Alexandre Baptista, Jean Dermine, Bernard Dumas, Paolo rald Hau, Pascal Maenhout, Urs Peyer, Matti Suominen, Lucia Tepla, Theo Vermaelen, and icipants at Oxford Saı̈d Business School, HEC Montréal, ESSEC, and CEMAF/ISCTE for comments, and Jean Cropper for editorial assistance. All remaining errors are our own. This ially revised version of a paper previously circulated with the title ‘‘Shareholder Portfolio the Market for Corporate Control: The Value of Long-Term Investors.’’ Pedro Matos and aspar kindly acknowledge the financial support of Programa Praxis XXI of Fundacão para ecnologia. nding author. Tel.: +331 6072 4481; fax: +33 1 6072 4045. dress: [email protected] (M. Massa).