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Received 10 June 1996
Final revision received 1 July 2002
Key words: governance; agency; refocusing; restructuring; takeovers
Hostile takeover attempts oftentimes signal that a target firm has an over-diversified and ineffective corporate strategy. What does this signal mean when takeover attempts fail? Drawing from agency theory, we argue that target firms managed by independent directory boards are likely to ignore the takeover attempt and not refocus their firms' strategy. Conversely, target firms managed by nonindependent boards are more likely to view the failed takeover attempt as a 'wake-up call' and will refocus their firms' strategy so as to preserve the firm's survival. These arguments are tested using a sample of 76 firms that were targets of failed hostile takeover attempts. Logistic regression analyses confirm the predictions. This study suggests that in the aftermath of a failed takeover attempt board of director characteristics can help predict changes in corporate strategies. Copyright ?2002 John Wiley &Sons, Ltd.
Hostile takeovers were popular actions in the 1980s, presumably because firms had become over-diversified from conglomerate acquisitions in the 1960s and 1970s, and buying these firms and then breaking them up could create value. Consequently, a hostile takeover attempt may be seen as a 'wake-up call' that the target firm had been managed inefficiently and that changes in management and strategies could produce value (Denis, Denis, and Sarin, 1997). This signal raises a question: What happens to the firms that effectively repel the takeover offer? Do these firms restructure so as to avoid future takeover offers? Or do they continue as before, with no significant changes to the target's strategy?
This study addresses these questions. Building from the agency theory arguments that takeovers are a disciplinary mechanism, we argue that target firms that have independent and vigilant directory board members are less likely to refocus their companies after the failed attempt. Such directors would have confidence in the strategies of their firms and believe the takeover offer was a mistake. In contrast, nonindependent and nonvigilant directors are more likely to view the takeover attempt as a signal that their firms are inefficient and vulnerable for another offer. We expect these firms will take actions to refocus their strategies to avoid further takeover attempts. These arguments are tested...