Managerial turnover and leverage under a takeover threat

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. This paper demonstrates that negative (positive) updating prevails when takeover costs are small (large). Managers who leve r up to end a takeover threat thus may commit to an increase in the firm's value and yet increase their chances of being replaced by their shareholders. The model predicts that intraindustry leverage is less dispersed when takeover costs are low.