The 1990 Pennsylvania Antitakeover Law: Should Firms Opt Out of Antitakeover Legislation?

Abstract

This paper examines the firm's opting out decision and the impact of the 1990 Pennsylvania Antitakeover Law on the stock prices of 123 firms. The results indicate that on average Pennsylvania stock returns decreased by 9 percent from introduction to passage. A comparison indicates that firms that opted out had CARs 18 percentage points higher than firms that chose not to opt out. The event study methodology may not be appropriate because investors may anticipate the passage of legislation and because there may be multiple events. Intervention analysis, an econometric technique not previously used in this area, is applied and the results support the agency cost hypothesis. A logit model is implemented to find the sources of the losses and gains and to study why firms choose to opt out. In this model, firms are controlled for antitakeover amendments, takeover activity, insider holdings, large noninsider holdings, size, and industry. Firms with a proxy for lower agency costs were found to be more likely to opt out of the legislation.