Firm Locations and Takeover Likelihood

We examine the impact of a firm’s geographic location on its takeover likelihood with a sample of U.S. public firms from 1980 to 2005. We first show that firms located in an urban area are 8.3% more likely to receive a takeover bid and 10.5% more likely to complete the takeover transaction than firms located in a non-urban area. Our findings are robust after controlling for various firm characteristics, alternative econometric specifications, and endogeneity in firm locations. We propose three alternative hypotheses to explain the observed difference in takeover exposures between urban and non-urban firms: the information hypothesis that argues urban firms are subject to less soft information asymmetry relative to non-urban firms; the governance hypothesis that argues managers of urban firms are less entrenched than those of non-urban firms; and the synergy hypothesis that argues urban firms are able to generate higher synergies for bidders than non-urban firms. Our evidence supports the information and governance hypotheses, but does not provide any support for the synergy hypothesis.