Managerial Turnover and Leverage under a Takeover Threat


  • Walter Novaes

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    • Novaes is from the Department of Economics at the Pontifical Catholic University of Rio de Janeiro. The author thanks Heitor Almeida, Kathy Dewenter, Wayne Ferson, Armando Gomes, Alan Hess, Nobuyuki Isagawa, Jon Karpoff, Humberto Moreira, Jeff Pontiff, Ed Rice, Luigi Zingales, René Stulz, Rick Green, two anonymous referees, and seminar participants at IBMEC, EPGE-FGY, PUC-Rio, and the 1999 Pacific Northwest Conference for helpful comments. All remaining errors are my own.


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.