Takeover regulation to protect shareholders: Wealth creation or wealth destruction?

Takeover regulation is fundamental to the efficient workings of the market for corporate control since it affects the size and distribution of expected gains to shareholders of targets and acquirers. To investigate the impact of takeover regulation on shareholders’ wealth distribution, we first construct a dynamic takeover law index consisting of six legal provisions for major European countries. Our index reveals that takeover law in the European Union has changed substantially over the past 25 years. We further examine the wealth effects of takeover law in European takeovers between 1986 and 2010. Our empirical results suggest that the effect of takeover law on target announcement returns and takeover premiums is positive, economically large, and statistically significant. We also find evidence that stricter takeover law does not reduce the returns to bidders. Overall, the effect of takeover law on total wealth effects from mergers and acquisitions is significantly positive. Finally, in terms of the components of our takeover law index, we find that the mandatory bid rule significantly increases the takeover premium, target announcement returns and combined returns; the ownership disclosure rule leads to higher target announcement returns and higher combined returns; whilst the fair-price rule and the squeeze-out rights rule may reduce the total gain enjoyed by the combined companies.