Disclosure Regulation and Corporate Acquisitions
While disclosure regulation is often viewed as critical in promoting capital formation and the well-functioning of capital markets, tightening disclosure rules could have important tradeoffs. These tradeoffs are especially pronounced and yet barely studied in the case of the takeover market. The available evidence is limited to the literature examining takeover regulations introduced in the last century (notably, the Williams Act of 1968 in the US), some of which included ownership disclosure requirements.
In our paper “Disclosure Regulation and Corporate Acquisitions,” we analyze the impact of the “Transparency Directive” (TPD) ‒a major disclosure regulation recently implemented in the E.U.‒ on takeover activity. This regulation imposed tighter disclosure requirements regarding the financial and ownership information provided by European public firms. Specifically, we study whether the obligation to disclose ownership information can raise acquisition costs and thus discourage takeovers.
The ongoing debate about the so-called “hidden ownership” acquisition strategy (also referred to as “stealth stake-building” or “creeping acquisitions”) illustrates how ownership disclosure can be costly for bidders. Hidden ownership consists of building a stake in the target firm through financial instruments that are not subject to ownership disclosure requirements. Several controversial acquisitions reflect anecdotally the occurrence and importance of these mechanisms in Europe.
The results from our analysis reveal that the implementation of the TPD was indeed followed by a significant drop in takeover activity. This decline was particularly sharp in the European countries with more dynamic takeover markets. The pattern is present among public companies ‒the only ones subject to the regulation‒ but not among private firms. Further corroborating the effect of disclosure regulation, we observe an additional drop-off in a later tightening of the directive.
To verify that the decline in M&A deals was related to an increase in acquisition costs, we also analyze share prices of acquirers and targets in the days surrounding the announcement of the deal. We observe the following: i) Stock returns of the target companies were higher after the directive. In other words, the acquisition premiums increased. ii) Stock returns of the acquiring companies were lower after the directive. iii) Bidder toeholds were smaller after the directive. That is to say, potential buyers had smaller stakes in their targets before announcing their takeover attempts.
Overall, our evidence suggests that tighter disclosure requirements can impose significant acquisition costs on bidders and thus slow down takeover activity. The results also indicate that, rather than stimulating less active takeover markets, the disclosure regulation appears to have slowed down markets that are more dynamic. That saidr, we call for caution when interpreting these results from a welfare perspective; while a decrease in takeover activity could increase agency costs and/or impair economic productivity; such a decrease could be desirable if it is concentrated in socially suboptimal takeovers.