Antitakeover Provisions Research Articles

The Causal Effect of Corporate Governance on Employee Satisfaction

We investigate whether an increase in shareholder rights has a causal effect on employee satisfaction. To ensure causality, we use close shareholder votes on anti-takeover provisions included in the Entrenchment Index (E-Index) by Bebchuk et al. (2009) as exogenous shocks to the corporate governance of a company. An increase in shareholder rights by one point on the scale of the E-Index causes lower employee satisfaction of approximately 10%. We identify decreases in the employee’s opinion on firm culture, their view about the company's CEO, the number of employees, and the capital expenditures as channels that drive our results.

Does Corporate Governance Matter to Bondholders?

We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990 through 2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with strongest management rights (strongest antitakeover provisions) and firms with strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about thirty-four basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.

How Does a Staggered Board Provision Affect Corporate Strategic Change?—Evidence from China’s Listed Companies

As China’s capital market has become more and more developed, listed companies have begun to establish some anti-takeover provisions to protect their controlling right. Existing studies have examined the consequences of the establishment of such provisions. However, few studies have explored how these provisions affect corporate strategic change. Based on agency theory and prospect theory, this paper proposes two channels through which one of the anti-takeover provisions, staggered board provision, impacts strategic change. Using the data of China’s listed companies which issue A-shares in Shenzhen and Shanghai stock exchanges from 2007 to 2014, these two channels are tested. We find that the existence of a staggered board provision negatively affects the extent of strategic change. In addition, if governance mechanisms restrict directors’ power, the relationship between staggered board provision and strategic change will be weakened, which supports the agency theory. If the listed company is faced with a more dynamic external environment, the relationship between staggered board provision and strategic change will be stronger, which supports the prospect theory. These results are robust after we use a different method to measure strategic change. Our conclusions not only enrich literature about strategic change and anti-takeover provisions, but also are helpful for improving corporate governance in China and other developing countries.

Trade Secrets Protection and Antitakeover Provisions

How do firms protect their human capital? We test whether firms facing an increased threat of being acquired strengthen their antitakeover provisions (ATPs) in order to bond with their employees. We use the adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts, which exogenously decreases knowledge-worker mobility, thus elevating takeover risk and reducing employee incentives to innovate. Firms respond to IDD adoption by strengthening ATPs that defend against hostile takeovers, especially when they have greater ex-ante employee mobility and human capital and place greater importance on employee relations. We find no evidence that managers strengthen ATPs for entrenchment or takeover bargaining purposes in this setting. Our findings show that ATPs can be used to credibly commit to employees in order to protect long-term value creation.

Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis

We study the effect of antitakeover provisions (ATPs) on innovation. To establish causality, we use a regression discontinuity approach that relies on locally exogenous variation generated by shareholder proposal votes. We find a positive, causal effect of ATPs on innovation. This positive effect is more pronounced in firms that are subject to a larger degree of information asymmetry and operate in more competitive product markets. The evidence suggests that ATPs help nurture innovation by insulating managers from short-term pressures arising from equity markets. Finally, the number of ATPs contributes positively to firm value for firms involved in intensive innovation activities.

Which Antitakeover Provisions Matter?

Antitakeover provisions play a central role in corporate governance research. But there is little agreement over which, if any, provisions affect takeover likelihoods. As a result, researchers variously use the G-index, E-index, ad hoc indices, or selected individual provisions such as classified boards, to measure firms’ takeover defenses. In tests that account for the endogenous use of antitakeover provisions, we find that only 11 of the 24 G-index provisions are negatively related to takeover likelihood. Various indices used in the literature to measure takeover defense relate to takeover likelihood to the extent they include this subset of provisions.

The Impact of Exogenous Corporate Governance Changes on Innovation and Market Value

We investigate how exogenous corporate governance changes in terms of anti-takeover provisions affect the innovation and market value of the firm. Consistent with our conjecture, using triple difference-in-differences models, we find that the unexpected changes in the interpretation of the case law cause a decrease in innovation for Delaware firms with classified boards, entrenched managers, and in less competitive industries. We also show that after the case rulings for Delaware firms, lower (higher) innovation activities are associated with lower (higher) market values. Our results are robust to inclusion of conventional governance measures, alternative model specifications, and different measures of innovation.

An agency perspective on the board of directors and corporate entrepreneurship

PurposeThe purpose of this study is to examine the relationship between board dependence, antitakeover provisions and their influence on corporate entrepreneurship (CE).Design/methodology/approachThe study uses agency theory as a framework to expand on the board dependence–CE relationship by injecting the moderating role of antitakeover provisions to the model. Using data collected from 350 publicly traded firms, a panel regression analyses was conducted on both innovation and venturing components of CE.FindingsThe findings of this study show a negative relationship between board dependence and CE. Further this study shows that such a negative relationship becomes weaker when higher levels of antitakeover provisions are injected into the model.Research limitations/implicationsThis study was conducted using a sample of large publicly traded firms within the information and manufacturing sectors, and so our findings may not be generalizable to firms in other contexts. Further, other variables representing CE (e.g. new product introductions) may add to this line of research in the future.Practical implicationsUnderstanding the role of board of directors within a firm may help foster CE throughout the organization.Originality/valueThis study expands on existing research by incorporating the influence of environmental factors (e.g. antitakeover provisions) and examining the relationship between corporate governance and CE using both measures of innovation and venturing.

Effectiveness of Bidders Internal Governance Structure

This paper examines the effectiveness of bidders’ internal governance mechanisms after controlling for the disciplinary role of the market for corporate control. In general, based on the full data sample, the evidence presented in this paper fails to refute the view that firms choose their internal governance mechanisms in a value-maximizing way. On average, bidders' anti-takeover provisions show no significant effect on the returns to bidders, and fail to significantly affect the lack of any significant relationship between board structure – board size and board independence – and the returns to bidders. However, for the sub-sample comprising bidders with high levels of anti-takeover provisions, board independence is found to be negatively related to the returns to bidders with high levels. One interpretation of this finding is that the effectiveness – benefits relative to the costs – of independent boards diminishes at high levels of anti-takeover provisions. For the sub-sample comprising bidders without classified boards, board size is positively related to the returns to bidders, indicating that the benefits to increasing board size appears to outweigh the costs for bidders without a classified board structure.

The separate and joint effects of the market for corporate control and board effectiveness on R&D valuation

This study finds that stronger market control (measured as fewer anti-takeover provisions) and more effective boards (measured as boards that are more independent and for which independent directors have more outside directorships) are both associated with higher R&D valuation. Furthermore, stronger market control (more effective board governance) is associated with higher R&D valuation only in the presence of weaker board governance (market control). Taken together, the results are consistent with the interpretation that both the market for corporate control and effective boards mitigate agency conflicts arising from R&D investments and improve the market valuation of R&D. Furthermore, the two mechanisms act as substitutes in doing so. JEL Classification: G34, G32, M41

Is corporate social responsibility a value-increasing investment? Evidence from antitakeover provisions

This study empirically tests whether corporate social responsibility (CSR) is a value-increasing investment by estimating the effect of antitakeover provisions on CSR. Results indicate that managerial entrenchment measured by the G-index of antitakeover provisions is negatively associated with CSR. However, this negative effect is driven by CSR strengths; G-index has no significant effect on CSR concerns. Overall, this study supports the stakeholder theory of CSR by showing that CSR is a value-increasing strategic investment, as entrenched managers tend to reduce CSR instead of overinvesting in it.

Corporate governance and firm value at dual class firms

This study explores whether corporate governance at dual class firms differs from that of their single class counterparts and whether firm value at dual class firms is associated with governance. Employing a sample of 1309 U.S. dual class firm-year observations for the period 1996–2006, we show evidence that dual class firms are more likely to employ more shareholder rights provisions while exhibiting lower board and board committee independence than single class firms. The results also show that shareholder rights increase while board provisions decrease in wedge at dual class firms. Further findings underscore that firm value at dual class firms decreases in wedge, and increases in shareholder rights and in board-related provisions, particularly in director independence. While strong board-related governance at dual class firms is significantly positively related to firm value in a multivariate setting, shareholder rights are significantly associated with firm value only in instances of the weakest board provisions. Following unification, firms employ more antitakeover provisions while strengthening their board and board committee independence.

Impact of Shareholder Proposals on the Functioning of the Market for Corporate Control

AbstractFirms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.

Antitakeover provisions and CEO monetary benefits: Revisiting the E-index

We analyze and group antitakeover provisions as they relate to CEO’s monetary benefits. We specifically focus on the determinants of the six E-index provisions that were proposed by Bebchuk et al. (2009) to conversely affect firm value. The six provisions are split into two indices: those that provide managers with a monetary benefit if a takeover was successful (MB provisions) and those that do not (TP provisions). Results indicate that CEOs with a role duality use their power to influence the adoption of MB provisions and resist the adoption of TP provisions. Moreover, in the presence of CEO duality, the relationship between MB provisions and firm value worsens. On the other hand, the relationship between TP provisions and firm value is unaffected by the presence of CEO duality. This suggests that CEOs having a role duality do not feel the need to work in the shareholders’ best interest when entrenched with MB provisions. Our findings suggest that studying all the provisions of the E-index as a whole can be misleading in some cases.

Effectiveness of Bidders Internal Governance Structure

This paper examines the effectiveness of bidders’ internal governance mechanisms after controlling for the disciplinary role of the market for corporate control. In general, based on the full data sample, the evidence presented in this paper fails to refute the view that firms choose their internal governance mechanisms in a value-maximizing way. On average, bidders' anti-takeover provisions show no significant effect on the returns to bidders, and fail to significantly affect the lack of any significant relationship between board structure – board size and board independence – and the returns to bidders. However, for the sub-sample comprising bidders with high levels of anti-takeover provisions, board independence is found to be negatively related to the returns to bidders with high levels. One interpretation of this finding is that the effectiveness – benefits relative to the costs – of independent boards diminishes at high levels of anti-takeover provisions. For the sub-sample comprising bidders without classified boards, board size is positively related to the returns to bidders, indicating that the benefits to increasing board size appears to outweigh the costs for bidders without a classified board structure.

Corporate Governance and Firm Value at Dual Class Firms

This study explores whether corporate governance at dual class firms differs from that of their single class counterparts and whether firm value at dual class firms is associated with governance. Employing a sample of 1,309 U.S. dual class firm-year observations for the period 1996-2006, we show evidence that dual class firms are more likely to employ more shareholder rights provisions while exhibiting lower board and board committee independence than single class firms. Results show that firm value at dual class firms increases in shareholder rights and in board-related provisions, particularly in director independence. While strong board-related governance at dual class firms is significantly positively related to firm value in a multivariate setting, shareholder rights are significantly associated with firm value only in instances of the weakest board provisions. Following unification, firms employ more antitakeover provisions while strengthening their board and board committee independence.

The Effects of Short-Selling Threats on Incentive Contracts: Evidence from an Experiment

This paper examines the effects of a shock to the stock-price formation process on the design of executive incentive contracts. We find that an exogenous removal of short-selling constraints causes firms to convexify compensation payoffs by granting relatively more stock options to their managers. We also find that treated firms adopt new antitakeover provisions. These results suggest that when firms face the threat of bear raids, they incentivize managers to take actions that mitigate the adverse effects of unrestrained short selling. Overall, this paper provides causal evidence that financial markets affect incentive contract design.

The Corporate Governance - Performance Puzzle: New Insights

This paper provides newer insights on governance – performance relationship using recent data (2007 to 2015) on anti-takeover provisions' incidence in the sample firms. Looking beyond the equally weighted methodology employed in related literature for constructing G-Index, E-Index, and Gov-Score, we present an alternate unequally weighted "new Governance (nG) Index" as governance proxy. We show that our proposed nG-Index traces governance – performance relationship more persistently than the equal-weighted measure. Firms with better governance structures are found to show higher firm values and superior operating performances in our sample period. Our analysis further reveals that a zero-investment hedge going long on poor governance stock portfolio and shorting the good governance one would have generated an abnormal return of over 1.33% per month or about 16% per year. This hedge is completely opposite to the long good governance – short poor governance strategy suggested in prior literature. We posit that such hedge reversal is an indication that, in recent years, investors seek compensation for high riskiness associated with poorly governed firms.

Impact of Classified Board on M&A Target Shareholder Value

It is not certain whether classified board is beneficial or deleterious to shareholders. We examine the implication of classified board on target shareholder value in the mergers and acquisitions context. We also investigate the impact of classified board on firm’s innovative activities. We find the existence of a classified board in the M&A target firm is positively related to the target shareholder value, such as the M&A announcement CAR and the target premium, but only for R&D-intensive firms. We also find that classified board increases the quality of innovation for R&D intensive firms. Our findings are consistent with the view that classified board may provide long-term perspectives that promote productive but risky R&D investment, which acquiring firms are willing to pay higher premiums for. We also find that the potential managerial entrenchment effect of classified board is less pronounced than that of CEO-chairman duality, strengthening the proponent view of classified board. We contribute to the corporate governance literature on the relationship between classified board and firm performance. We provide evidence that classified board may enhance target shareholder value in M&A context via better R&D investment, which is distinct from enhancement by virtue of stronger bargaining power as posited in the extant literature. We also contribute to the innovation literature by showing that protection from the market for corporate control by classified board may promote firm’s innovative activities. Our findings suggest that classified board, an anti-takeover provision that many practitioners and policy makers suspect to be a managerial entrenchment mechanism that diminishes shareholder value, may not be universally harmful to shareholders. Rather, it may provide appropriate level of protection so that the management can invest in risky but value-enhancing innovative activities.

Takeover defenses: Entrenchment and efficiency

This paper explores the potential role of anti-takeover provisions (ATPs) in long-term value creation. Using a change in the legal environment in Delaware as an exogenous event, we document that a subset of firms with a relatively longer term focus (innovative firms) benefit from ATPs. Particularly, these firms experience an increase in Tobin's Q following a state law change in Delaware that increases the effectiveness of ATPs in defending against hostile takeovers. This increase is greater than that for non-innovative firms in Delaware as well as for innovative firms outside Delaware. Furthermore, the innovative firms in Delaware experience a stronger positive market reaction around the state law change dates, relative to other firms. Finally, in a cross-sectional setting we find that innovative firms with above-average takeover protection outperform other firms and are less likely to engage in harmful real earnings management. Taken together, these results provide empirical evidence of potential benefits of ATPs and help explain why such protection continues to be prevalent in the United States.