Does product market competition discipline managers? Evidence from exogenous trade shock and corporate acquisitions

This study uses the 1989 Canada-U.S. Free Trade Agreement as a source of exogenous shock to product markets to establish a causal effect of competition on acquisition returns to bidder shareholders. Following the trade liberalization, acquirers exposed to a greater increase in competitive pressure experience significantly higher announcement returns. The positive impact of increased competition on acquisition returns is uniquely stronger in acquirers who have relatively higher agency costs and who, therefore, can benefit the most from the disciplining effect of competition. This superior performance by acquirers exposed to increased competition mostly comes from choosing targets with higher synergies. Managers of acquirers facing more foreign competition after 1989 are more likely to be terminated following value-destroying acquisitions. Overall, the results provide strong support for the view that intensifying competition can positively influence the efficiency of firm investment decisions.