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Managerial Turnover and Leverage under a Takeover Threat

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  • Walter Novaes

    (Department of Economics at the Pontifical Catholic University of Rio de Janeiro)

Abstract

How do shareholders perceive managers who lever up under a takeover threat? Increasing leverage conveys good news if it reflects management's ability to enhance value. It conveys bad news, though, if inefficient managers are more pressured to lever up than the efficient ones. This paper demonstrates that negative updating may prevail. Managers who lever up to end a takeover threat may thus commit to enhance value and yet increase their chances of being replaced by their shareholders. The model provides implications for the dispersion of intraindustry leverage and for the stock price reaction to debt-for-equity exchanges. Copyright The American Finance Association 2002.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 6 (December)
Pages: 2619-2650

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:6:p:2619-2650

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Cited by:
  1. Cai, Mingchao & Li, Yue & Wang, Yongxiang & Xu, Rong, 2010. "Is the more able manager always safer from takeover?," Economic Modelling, Elsevier, vol. 27(1), pages 28-31, January.

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