Corporate complexity, managerial myopia, and hostile takeover exposure: Evidence from textual analysis

Exploiting a novel measure of firm complexity based on textual analysis (Loughran and McDonald, 2020), we explore the effect of hostile takeover exposure on firm complexity. Our results demonstrate that more takeover vulnerability leads to less complex firms. Hostile takeover threats diminish managers' job security and thus exacerbates managerial myopia. Short-sighted managers focus on short-term investments at the expense of more complex, long-term, projects, resulting in lower corporate complexity. Our measure of takeover susceptibility is principally based on state legislation, which is plausibly exogenous. Therefore, our results are more likely to reflect causality than merely an association. Further analysis corroborates the results including propensity score matching, entropy balancing, an instrumental-variable analysis, and using Oster's (2017) method for testing coefficient stability. (C) 2021 Elsevier B.V. All rights reserved.