Antitakeover Provisions Research Articles

Do Entrenched Managers Prefer Bonds?

Prior research has documented both positive (John and Litov, 2009) and negative (Berger, Ofek, and Yermack, 1997) relationships between managerial entrenchment and the use of debt. This paper further investigates the impact of corporate governance on firm leverage by taking into account the substitution effect of different governance mechanisms. Consistent with John and Litov (2009), we find that antitakeover provisions have a positive effect on firm leverage. However, this effect disappears when we control for the interaction effect between antitakeover provisions and board power, measured by board independence. More specifically, we find that entrenched managers operate highly leveraged firms only if they are exposed to powerful boards. The result of this positive relationship between firm leverage and the interaction of board power and antitakeover provisions continues to hold even after we consider other governance variables.

Tradeoffs between Internal and External Governance: Evidence from Exogenous Regulatory Shocks

We use the 2002 NYSE and NASDAQ listing requirements mandating firms have a majority of independent directors on the board as an exogenous shock to examine the interaction between internal and external governance. Relative to compliant firms, noncompliant firms significantly reduced exposure to three external governance mechanisms: the market for corporate control, shareholder activism, and credit markets, by adding antitakeover provisions, adopting officer and director protection provisions, and reducing debt levels, respectively. The results are stronger in firms with greater exposure to the relevant external governance mechanism. The evidence suggests that firms treat internal and external governance as substitutes.

Mergers and acquisitions: CEO duality, operating performance and stock returns in Vietnam

The market for corporate control in Vietnam is characterized by the absence of major antitakeover provisions typically available in developed markets. The disciplinary threat of losing corporate control and additional monitoring mechanisms in the Vietnamese institutional setting reduce managerial entrenchment and other agency costs of CEO duality. This paper provides evidence in support of stewardship theory that CEO duality positively impacts M&A results in Vietnam. Specifically, CEO duality firms have significantly higher announcement abnormal returns and growth performance than those with separate CEO/Chairman roles. Robustness checks include two stage least square regressions and propensity score matching techniques.

The Impact of Internal and External Firm-Level Mechanisms on Corporate Performance During the Financial Market Crisis (2007-08)

This paper examines the Firm-Level internal and external control governance mechanisms during the financial market crisis of 2007-08. This study employs two different methods by dividing a portfolio of 136 firms into two samples to examine the effects of both the internal and external control mechanisms. The first sample uses a regression of a normal Ordinary Least Square (OLS) robust standard error and then extending it to include entity effects, time effects and both entity and time effects. In the second sample, we run a binary regression to enable us to predict the probability of survival for each company. Based on both samples, we find a positively significant correlation between the internal firm mechanisms, shareholders wealth maximization proxied by stock return during the financial crisis. The binary regression provides a negatively significant support that with strong and higher external control mechanisms proxied by IRRC anti-takeover provisions, leads to a weak shareholders and, in turn, negatively influence the shareholders wealth proxied by stock return and the probability of surviving during uncertainty.

Do Poorly Governed Acquirers Transfer Wealth to Targets in Cross‐Border Acquisitions?

We use the number of antitakeover provisions (ATPs) as a proxy for corporate governance and examine its impact in US domestic and foreign acquisitions made by US acquirers. We find that the targets of poorly governed acquirers earn higher postannouncement premiums, despite controls for deal characteristics, macroeconomic conditions, and country‐level protections, suggesting that these acquirers overpay. Puzzlingly, in contrast with the domestic US findings of Masulis, Wang, and Xie, poorly governed acquirers in cross‐border deals experience higher announcement period returns. The relation between governance and target returns appears concave, but this nonlinearity disappears once differences in country‐level governance and deal characteristics are accounted for.

Meet/Beat Market Expectation, Accounting Conservatism and Corporate Governance

Accounting conservatism has been recognized as a reporting strategy that benefits shareholders and financial statement users. We hypothesize that managers in general are likely to sacrifice the benefit associated with accounting conservatism when adopting meeting/beating market expectations (hereafter MBME). Our findings show a negative association between MBME, proxied by analysts’ consensus forecasts, and accounting conservatism, defined in terms of conditional conservatism (Basu, 1997; Ball and Shivakumar, 2005, 2006) and we show that such relationship is not a mechanical connection between reporting strategy and managerial incentives to report higher earnings. Further analysis show that the negative relationship still exists after controlling for expectation as well as accrual-based and real earnings management. However, we document that G-index (Gompers et al., 2003), reflecting corporate governance in terms of anti-takeover provisions, has a significant impact on the negative association between accounting conservatism and MBME. Such finding shows that firms with less anti-takeover provisions, proxied by G-index, are less likely to sacrifice the benefit associated with conservative accounting for MBME.

The dark side of CEO ability: CEO general managerial skills and cost of equity capital

CEOs with substantial general managerial ability (generalist CEOs) possess a substantial share of organization (human) capital and have different risk-taking incentives than do their counterpart specialist CEOs. Using an index increasing in CEO general managerial skills as a proxy for general managerial ability, we find that investors require higher returns from firms featuring CEOs who have profuse general managerial ability. Furthermore, expected returns are significantly increasing with CEO general managerial ability in firms with high organization capital, that belong to M&A-intensive industries and that have complex operations, high agency problems and high anti-takeover provisions. These findings are consistent with arguments that organization (human) capital has significant expected return implications and that CEOs with higher general managerial skills may lead to higher agency problems, feature different risk-taking incentives and be more costly to retain in times of need.

Do M&A Lawsuits Discipline Managers' Investment Behavior?

Using securities lawsuits related to M&A as an industry shock, we examine whether litigation risk acts as an external governance mechanism by disciplining managers' investment decisions. In the two years following an M&A lawsuit (a lawsuit where plaintiffs allege that the firm hid poor performance related to a prior acquisition), we find that industry peers experience higher bidder announcement returns, choose more adequate methods of payment, and engage in fewer diversifying and smaller takeovers. Collectively, this evidence is consistent with post lawsuit deals being of higher quality. Furthermore, we find that peer firms respond to the increased litigation risk by reducing abnormally high investment expenditures. Finally, the reactions are stronger among firms with fewer anti-takeover provisions. Overall, our results show that M&A lawsuits can have an industry-wide deterrence effect on firms' suboptimal investment behavior.

What Does an LBO Signal for the Target's Rivals?

We document the implications of an LBO for the target firm’s peers in terms of follow-on acquisitions, alliances, investment, and governance changes. LBOs tend to lead overall merger activity, predicting both more LBOs and strategic acquisitions in the industry. LBOs predict significant changes to investment outlays, strategic alliances, and anti-takeover provisions. Tests show that our evidence is most consistent with LBOs causing or signaling private information about optimal changes to the industry rather than LBO sponsors simply selecting into changing industries. Our study sheds light on LBOs’ role in merger activity as well as their motivation.

Takeover Defenses: Entrenchment and Efficiency

This paper explores the potential role of anti-takeover provisions (ATPs) in long-term value creation. Using multiple research designs, we find that long-term focused (innovative) firms benefit from takeover protection. We also find that the protected innovative firms are less likely to engage in myopic activities, which is consistent with protection reducing short-term pressures on innovative firms. In contrast to prior research that predominantly documents evidence of harmful effects of ATPs on average, we show that ATPs can provide benefits to a subset of firms.

Growth Opportunities, Short-Term Market Pressure, and Dual-Class Share Structure

While the costs associated with dual-class shares and other antitakeover provisions are widely documented, the benefits are rarely studied in the literature. We test the hypothesis that dual-class shares, like other antitakeover provisions, can help managers focus on the implementation of long-term projects while avoiding short-term market pressure. Consistent with this idea, we find that dual-class firms face lower short-term market pressure than single-class firms. In particular, they have less transient or short-term institutional holdings, a lower probability of being taken over, and lower analyst coverage. Dual-class firms also tend to have more growth opportunities (higher sales growth and R&D intensity) than single-class firms. To address endogeneity concerns, we evaluate a sample of dual-class share unifications and find that growth opportunities decline while short-term market pressure increases after share unifications.

Antitakeover Provisions and Shareholder Wealth: A Survey of the Literature

AbstractWe survey theoretical and empirical research on antitakeover provisions, focusing on the relation between antitakeover provisions and shareholder value. We divide the empirical studies based upon the evidence that they provide: short-term event studies, studies on performance and policy changes around adopting antitakeover provisions or passing state antitakeover laws, studies on the impact of antitakeover provisions on takeovers, studies on the relation between antitakeover provisions and firm characteristics, and long-term studies on the relation between antitakeover provisions and firm performance or policies. We also discuss the place of antitakeover provisions in the current debate about “good governance” practices.

Dark Side of CEO Ability: CEO General Managerial Skills and Cost of Equity Capital

CEOs with substantial general managerial ability (generalist CEOs) possess a substantial share of organization (human) capital and have different risk-taking incentives than do their counterpart specialist CEOs. Using an index increasing in CEO general managerial skills as a proxy for general managerial ability, we find that investors require higher returns from firms featuring CEOs who have profuse general managerial ability. Furthermore, expected returns are significantly increasing with CEO general managerial ability in firms with high organization capital, that belong to M&A-intensive industries and that have complex operations, high agency problems and high anti-takeover provisions. These findings are consistent with arguments that organization (human) capital has significant expected return implications and that CEOs with higher general managerial skills may lead to higher agency problems, feature different risk-taking incentives and be more costly to retain in times of need.

The Association between Corporate Governance and Firm Performance - A Meta-Analysis

Research suggests that firms with better corporate governance outperform others. However, the literature provides no consensus about the direction or magnitude of the relationship. This paper seeks to clarify the relationship between corporate governance and firm performance by conducting a meta-analysis of 25 previous studies. The analysis has three specific concerns i.e., the moderating effects of (1) legal systems (common law or civil law), (2) governance mechanisms (external or both external and internal governance) and (3) performance measures (accounting or market value). The findings show that the external governance mechanisms measured by antitakeover provisions and market value of firm performance measured by Tobin’s Q and market to book value are the key moderators of this relationship. This paper has important implications for regulators and directors by proposing external governance to be an influential factor of firm performance. This paper is also of interest to the investors and companies by highlighting the significant relationship between corporate governance and market value of the firm.

The association between corporate governance and firm performance – a meta-analysis

Purpose– The purpose of this paper is to investigate the relationship between corporate governance and firm performance by conducting a meta-analysis of 25 previous studies. The analysis has three specific concerns, i.e. the moderating effects of legal systems (common law or civil law), governance mechanisms (external or both external and internal governance together) and performance measures (accounting or market value).Design/methodology/approach– The methodology used is the meta-analysis technique developed by Hunteret al.(1982).Findings– The findings show that the external governance mechanisms measured by anti-takeover provisions and market value of firm performance measured by Tobin’s Q and market to book value are the key moderators of this relationship.Practical implications– This paper has important implications for regulators and directors by proposing external governance to be an influential factor of firm performance. This paper is also of interest to the investors and companies by highlighting the significant relationship between corporate governance and market value of the firm.Originality/value– As the author finds that the external governance mechanism (anti-takeover provisions) exerts more influential effect on firm performance than both external and internal governance together, this research confirms the imperative for external governance to increase the firm value.

Why Has the Literature on Corporate Governance and Firm Performance Yielded Mixed Results?

This paper reviews the empirical literature on corporate governance and firm performance and finds that it has yielded mixed results. The paper argues that a primary reason for this situation is that the relevant theories have not been applied to the class of phenomena they were designed to explain. In particular, the literature that focuses on ownership structure and firm performance employs entrepreneurial agency theories of the firm but applies them to managerial firms where ownership is separated from control. This is evidenced by the fact that firms in which managerial ownership is close to zero percent are included in the samples. Conversely, empirical work centered on the relationship between board composition and firm performance (which relies on managerial agency theories of the firm) not only does not make sure that the firms in their samples are characterized by the separation of ownership and control, but it also ignores the alternative managerial agency theory concerning the agency costs of free cash flows. Additionally, the paper maintains that other approaches, such as that which studies the relationship between indices of antitakeover provisions and firm performance, do not rely on any particular theory and for this reason are beset by problems of interpretation. The paper concludes with recommendations for avoiding the drawbacks and achieving future progress.

Management Quality and Anti-Takeover Provisions

We present the first analysis in the literature of the relationship between the quality and reputation of a firm's management and the prevalence of anti-takeover provisions in the corporate charters of IPO firms, and the influence of this relationship on post-IPO performance. We test the implications of two theories regarding the above two relationships: the hypothesis, which implies that anti-takeover provisions are meant mainly to enhance the control benefits enjoyed by existing firm management by minimizing the probability of takeovers by rival management teams; and the value hypothesis, which argues that such provisions, while they entrench firm management, can also be value enhancing in the hands of higher quality management teams. Our empirical results can be summarized as follows. First, firms with higher quality managements are associated with a greater number of anti-takeover provisions relative to those with lower quality managements. Further, within the former category, firms with larger growth options are associated with a greater number of anti-takeover provisions. Second, when we divide our sample by management quality (higher versus lower) and then by the number of anti-takeover provisions (greater versus smaller) within each management quality category, firms with higher management quality and a greater number of anti-takeover provisions outperform firms in the remaining three categories in terms of both post-IPO operating and post-IPO stock return performance. The evidence thus rejects the managerial entrenchment hypothesis and supports the long-term value creation hypothesis.

The Lifecycle of the Firm, Corporate Governance and Investment Performance

According to firm lifecycle theory the agency costs of free cash flows are not transitory problems, but are a recurrent issue once firms reach a certain stage in their lifecycle. In particular, as firms mature their cash flows increase substantially while their investment opportunities decline and, to prevent retrenchment, managements need to invest in negative net present value projects. However, too much overinvestment leads to low firm valuation and potentially a hostile takeover. This paper extends firm lifecycle theory by arguing that to neutralize the threat of takeover, managements of maturing firms and their boards of directors progressively deploy antitakeover provisions which allow them to overinvest safely and prevent a decline in the size of their corporations. Firm lifecycle theory is also tested empirically. In this respect, a contribution of this paper is to develop a new empirical index that permits the identification of mature corporations with governance problems due to agency costs of free cash flows. The empirical results show that as firms mature agency costs of free cash flows increase, more antitakeover provisions are put into place and firms invest in projects with returns below their cost of capital.

Shareholder Coordination, Corporate Governance, and Firm Value

Ease of coordination can enable diffuse shareholders to play a more effective role in corporate governance and thereby increase firm value. Using geographical proximity and correlation in portfolio allocation decisions as proxies for the ease of coordination, I find evidence that ease of coordination among institutional shareholders is positively associated with firm value. To identify the effect of shareholder coordination on firm value, I exploit two plausibly exogenous shocks to shareholder coordination, namely mergers of asset management firms and the 1992 proxy reform. Difference-in-differences estimates show that ease of coordination increases firm value. I further show that an exogenous decrease in ease of shareholder coordination leads to fewer anti-takeover provisions being rescinded, overly excessive CEO compensation, lower equity-based pay for CEOs, and a lower likelihood of that a CEO is replaced following poor performance. Overall, these findings suggest that ease of coordination improves firm value by enhancing the governance role provided by shareholders.

The lifecycle of the firm, corporate governance and investment performance

According to firm lifecycle theory the agency costs of free cash flows are not transitory problems but are a persistent issue for mature firms. This paper extends the theory by suggesting that to neutralize the threat of takeover the controlling parties of maturing firms progressively deploy antitakeover provisions, and this allows them to overinvest safely and prevent retrenchment. Another contribution of this paper is to develop a new empirical index that permits the identification of mature corporations with governance problems due to agency costs of free cash flows. Empirical results show that as firms mature free cash flows increase, more antitakeover provisions are put into place and negative net present value projects are undertaken.