Firm Disclosure Response to the Threat of Takeover: Testing the Corporate Control Contest Hypothesis

We test the corporate control contest hypothesis which predicts that managers use voluntary disclosure to reduce the likelihood of job loss when faced with control threats. We exploit the exogenous control shock experienced by firms upon the hostile takeover announcements of rival firms. This identification is based on existing research findings that a merger announcement in the industry increases the likelihood of peer firms becoming targets themselves and that corporate control contests increase the probability of management turnover. We employ a difference-in-difference design to test peer disclosure reaction relative to control firms. We find that, after the control shock, peer managers resort to more transparent disclosure as evidenced by managerial conference call language that is easier to understand and more transparent. Peer managers also provide more management guidance, more bad news guidance, and issue more 8K filings after the shock. Our study contributes to the voluntary disclosure literature by providing much needed evidence supporting the corporate control contest hypothesis. Preliminary. Please do not quote or circulate. Comments welcome. * Corresponding author. We thank the McCombs Research Excellence Grant of the University of Texas at Austin for funding to obtain the StreetEvent data. All errors are our own. 1 Firm Disclosure Response to the Threat of Takeover: Testing the Corporate Control Contest Hypothesis