Does product market competition discipline managers? Evidence from exogenous trade shock and corporate acquisitions

This study uses the 1989 Canada-U.S. Free Trade Agreement as a source of exogenous shock to product markets to establish a causal effect of competition on acquisition returns to shareholders. Following the agreement, acquirers exposed to greater increases in competitive pressure experience higher announcement returns. The positive impact of increased competition is stronger in acquirers with relatively higher agency costs. Improvements in merger performance mostly come from choosing targets with higher synergies. Managers of acquirers facing more competition are more likely to be terminated following value-destroying acquisitions. These results suggest that intensifying competition positively influences the efficiency of managerial decisions. JEL classifications: F13, G34, L1.