Managerial Entrenchment Hypothesis Research Articles

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.

Does industry-adjusted corporate governance matter in mergers and acquisitions?

This paper is the first to investigate the effect of firm governance characteristics on takeover premiums and returns using an industry-adjusted corporate governance measure. We demonstrate that the worse the governance characteristics of the target firm are, relative to the industry average, the more its efficiency is improved by the acquisition, and the greater the synergistic gains and target’s return are at the announcement of an acquisition. The study also finds a positive relation between the acquirer’s governance characteristics and the combined returns, supporting the management entrenchment hypothesis. Unlike prior research that does not control for industry average governance index, we do not find a relation between acquirer returns and the industry-adjusted governance characteristics of the acquirer or the target. Our results advocate the notion that firm-specific governance partially explains the returns of a merger as industry-specific characteristics play a major role in the determination of corporate governance quality

The effects of anti-takeover measures on Japanese corporations

This study examines 130 Japanese firms that announced and adopted pre-warning anti-takeover measures between 2005 and 2007. Consistent with the managerial entrenchment hypothesis, the announcement-associated abnormal returns are negative and statistically significant. An examination of the relationship between the abnormal returns and the firm’s ownership structure also supports the signaling hypothesis. The abnormal returns are positively related to the managerial shareholding variable as the managerial shareholding variable ranges from near-zero to an intermediate level; however, the relationship becomes negative as managerial shareholding increases past intermediate levels. Nevertheless, further examination of the post-adoption operating performance shows no significant trend towards deterioration as is predicted by the managerial entrenchment hypothesis. The results primarily support the signaling hypothesis: Japanese managers adopt anti-takeover measures mainly to deter hostile takeovers, and the anti-takeover measures, per se, do not fundamentally affect managerial behaviors.

Capital structure – does ownership structure matter? Theory and Indian evidence

PurposeBased on the agency theory, the purpose of this paper is to theoretically argue and empirically investigate how ownership structure impacts the capital structure of the listed mid‐cap companies in India and whether the capital structure as exogenous variable has a role in determining ownership structure as well.Design/methodology/approachSimultaneity between capital structure and ownership structure is checked through Hausman specification test on endogeneity. Fixed effect panel regression model is used to analyze five years of data (2005‐2009) on the sample units, to find the relation between leverage and ownership structure after controlling for profitability, risk, tangibility, growth and size.FindingsEmpirical results on Indian firms suggest that the ownership structure does impact capital structure but not the vice versa. Consistent with theoretical prediction empirical results reveal that the leverage is positively related to concentrated shareholding and has a negative relation with diffuseness of shareholding after controlling for profitability, risk, tangibility, growth and size. The findings are consistent with “managerial entrenchment hypothesis” and “pecking order theory” of capital structure.Practical implicationsThe findings of the paper will enable the practitioners and analysts to understand as to why, in the bank and financial institution‐dominated debt financing system in India, leverage is closely associated with concentrated ownership pattern and why retained earning is a preferred vehicle of financing for the firms with diffused shareholding.Originality/valueThe results of the study enrich the literature on capital structure, agency cost and corporate governance issues in several ways.

CEO Network Centrality and Merger Performance

We use director relational data from BoardEx to construct social networks of executives and directors of US public companies and calculate four measures of network centrality: Closeness, Degree, Betweenness and Eigenvector centrality for each individual connected into such network. CEOs with higher levels of network centrality may obtain more private information from their social contacts, which could translate to better decision-making on the job (private information hypothesis). On the other hand, more centrally positioned CEOs may derive influence and power from being well-connected and thus be more insulated from disciplinary actions brought about by the corporate control market and the executive labor market (managerial entrenchment hypothesis). By studying outcomes of M&A’s, we introduce evidence that supports the managerial entrenchment hypothesis. More centrally positioned CEOs are more likely to bid for other publicly traded firms, and these deals carry greater value losses to the acquirer, and greater losses to the combined entity. Stronger corporate governance in the form of intensive board monitoring, non-CEO Chairman, and block ownership at the bidder company can partially mitigate such effects. Following the CEOs and their firms five years after their first value-destroying deals, we find that firms run by more centrally positioned CEOs withstand the external threat from market discipline. Moreover, the managerial labor market is less effective in disciplining centrally positioned CEOs because they are more likely to find alternative, well-paid jobs. Ultimately, we show that CEO personal networks can have their “darker side” - well-connected CEOs may become powerful enough to pursue any acquisitions, regardless of the impact on shareholder wealth.

Management Quality and Antitakeover Provisions

We present the first empirical analysis of the relationship between a firm’s management quality and the prevalence of antitakeover provisions in its corporate charter and their influence on initial public offering (IPO) valuation and post-IPO performance. We test the implications of the managerial entrenchment hypothesis, which implies that antitakeover provisions serve only to enhance the control benefits of incumbent management, and the long-term value creation hypothesis, which implies that such provisions can enhance value in the hands of higher quality management. We find that, first, firms with higher quality management and greater growth options are associated with a greater number of antitakeover provisions. Second, firms with higher management quality and a greater number of antitakeover provisions outperform other firms in the sample in terms of post-IPO operating and stock return performance and obtain higher IPO valuations. Our findings reject the managerial entrenchment hypothesis and support the long-term value creation hypothesis.

건설업과 제조업의 기업성과에 대한 소유구조의 효과성 분석

Abstract This study proposed to compare the performance differences between a manufacturing company and a construction company in accordance with the mutual relations and ownership structures with the management performance based on the increase or decrease of the large shareholders' share-holding ratio (insider ownership, foreign share-holding, institutional investors' share-holding) of a KOSPI listed company in Korea during 10 years(1998-2007). To sum up the research work, first, the increase of foreign share-holding supported the results of previous studies which foreign share-holding has a positive effect on the long term performance by having a positive(+) effect on MTB, and the increase of an insider ownership supported the management entrenchment hypothesis of previous studies by having a negative(-) effect on MTB. However, relations between institutional investors's share-holding and MTB could not find out linkages in spite of the results of previous studies where dealt with the active monitoring hypothesis. Also, to examine the linkages of ROA and the ownership structure, though the increases of foreign share-holding and insider ownership had a positive(+) effect on ROA, the increases of institutional investors' share-holding had a negative(-) effect on it. It showed different analysis results from the active monitoring hypothesis of institutional investors. As a result of verifying whether there is any difference in the management performances between the construction industry and the manufacturing industry according to the equity which is the second hypothesis, nothing of the insider ownership and whether or not there is the construction industry, foreign share-holding and whether or not there is the construction, and the institutional ownership and whether or not there is the construction industry gave a statistical difference to MTB and ROA. Accordingly, it was possible to find out there is no difference in the management performance between the construction industry and the manufacturing industry based on the ownership structure in spite of different characteristics from the manufacturing industry such as the revenue recognition in ordering, production and accounting.

Capital Structure – Does Ownership Structure Matter? Theory and Indian Evidence

Purpose – Based on the agency theory, the purpose of this paper is to theoretically argue and empirically investigate how ownership structure impacts the capital structure of the listed mid-cap companies in India and whether the capital structure as exogenous variable has a role in determining ownership structure as well. Design/methodology/approach – Simultaneity between capital structure and ownership structure is checked through Hausman specification test on endogeneity. Fixed effect panel regression model is used to analyze five years of data (2005-2009) on the sample units, to find the relation between leverage and ownership structure after controlling for profitability, risk, tangibility, growth and size. Findings – Empirical results on Indian firms suggest that the ownership structure does impact capital structure but not the vice versa. Consistent with theoretical prediction empirical results reveal that the leverage is positively related to concentrated shareholding and has a negative relation with diffuseness of shareholding after controlling for profitability, risk, tangibility, growth and size. The findings are consistent with “managerial entrenchment hypothesis” and “pecking order theory” of capital structure. Practical implications – The findings of the paper will enable the practitioners and analysts to understand as to why, in the bank and financial institution-dominated debt financing system in India, leverage is closely associated with concentrated ownership pattern and why retained earning is a preferred vehicle of financing for the firms with diffused shareholding. Originality/value – The results of the study enrich the literature on capital structure, agency cost and corporate governance issues in several ways.

Private placements of convertible securities: stock returns, operating performance and abnormal accruals

AbstractThis study examines long‐run stock returns, operating performance and abnormal accruals of private placements of convertible securities. We investigate the effects surrounding private placements to test and differentiate the implications of several competing hypotheses. While the monitoring and certification hypotheses suggest positive effects, the managerial entrenchment, overvaluation and windows‐of‐opportunity hypotheses suggest the opposite. We find that placing firms generally experience positive effects in the pre‐periods and negative effects in the post‐periods. Our overall findings are more consistent with the predictions of the overvaluation and windows‐of‐opportunity hypotheses while our post‐placement evidence is also consistent with the predictions of the managerial entrenchment hypothesis.

Empirical Test about Differential Board Monitoring and CEO Compensations in High-Tech vs. Traditional Firms

I examine how firm characteristics and CEO compensation contract affect the independent board monitoring activities between high-tech and traditional firms. Corporate board monitoring activities are measured by annual board meetings, and the propensity to hold board meetings is significantly and positively associated with the size of the firm and is significantly and negatively associated with Return on Equity (ROE) as predicted by corporate governance under managerial entrenchment hypothesis. Using data on 1,735 corporations during 1992-2000, I find evidence that high-tech firms use different compensation plans to motive CEOs and exhibit different attributes from those of traditional firms. CEOs in both high-tech and traditional firms who have long tenure, high level of cash compensation are less likely to hold frequent board meetings. However, the existence of executive stock options and CEO long-term incentive plan may increase the frequency of board meetings. My model performs well in predicting number of board meetings for high-tech and traditional firms using out-of-sample period of year 2001 and 2002. My results extend and refine the growing literature on the relation of executive compensation, board activitiesand corporate governance.

Ownership structure and corporate performance: Australian evidence

This paper seeks to analyse the relationship between ownership structure and corporate performance for fifty firms listed on the Australian Stock Exchange during 2002-2003. The study initially tests a two equation model similar to that in the existing literature, but is distinguished from prior literature by subsequently reclassifying leverage. By categorising leverage as an endogenous variable, an examination of the relationship between ownership and performance is undertaken through ordinary least squares and two stage least squares analysis of a three equation econometric model. Interestingly, empirical results illustrate the fact that managerial ownership impacts negatively on firm performance which is consistent with the management entrenchment hypothesis

Anti-Takeover Provisions and Corporate Disclosure

We examine the effects of anti-takeover provisions (ATPs) on corporate disclosure by testing the following two hypotheses: (1) The market pressure hypothesis, which predicts that firms with more ATPs will provide more information to the market and have higher earnings quality because ATPs shield managers from short-term market pressures so that managers can pursue long-term shareholder interests; (2) The management entrenchment hypothesis, which predicts that firms with more ATPs will disclose less information and have lower earnings quality because ATPs help entrenched managers pursue private benefits at the expense of shareholders. We find support for the market pressure hypothesis, not the management entrenchment hypothesis. High-ATP firms are more likely to make management earnings forecasts than low-ATP firms, especially when the forecast conveys bad news and when a large fraction of the firm’s institutional investors are transient investors. Low-ATP firms are also more likely than high-ATP firms to postpone their forecasts until the end of the quarter. The market reaction is stronger to negative forecasts made by low-ATP firms than to negative forecasts made by high-ATP firms. The quality of reported earnings of high-ATP firms is better than that of low-ATP firms. Evidence from analyst earnings forecasts is consistent with the above findings: analyst earnings forecasts of low-ATP firms are more optimistically biased and less accurate, especially early in the quarter, compared to those of high-ATP firms.

Firm Performance, Entrenchment and Managerial Succession in Family Firms

This paper investigates the role of the family status of a company's top officer in managerial replacement decisions for a sample of 683 UK companies over the period 1992 to 1998. We report evidence that family firms are characterised by higher levels of board control, and weak internal governance in the form of independent company board structures. Consistent with a managerial entrenchment hypothesis, we find evidence that family CEOs are less likely to be removed from their position following poor performance than non-family CEOs. This relationship occurs even after controlling for the ownership of the company's top executive, suggesting that family status conveys additional power to the company's top officer in excess of that implied by their shareholding alone. Stock prices react favourably when companies announce that departure of a family CEO, but only when these directors are replaced by a non-family successor. We also report evidence of increases in operating performance following the departure of a family CEO, which are not witnessed following non-family CEO departures amongst our sample companies. Finally, we also find growth in company sales and employment following family CEO departures in excess of that witnessed following non-family CEO departures, indicating an untapped potential that family CEOs were unable to exploit prior to their departure. Overall, our results appear consistent with a managerial entrenchment hypothesis of the family status of a company's CEO, whereby the cash flows that shareholders expect to receive following their replacement are in excess of those anticipated under the family CEO.

Greenmail Share Repurchases and Alternative Corporate Performance Measures

This research uses accounting information to supplement abnormal returns evidence in order to gauge the performance of greenmailed firms. Our results support the management entrenchment hypothesis; target firm earnings are poor relative to industry in the years surrounding the greenmail event, and earnings do not significantly improve as would be expected under the shareholders' interest hypothesis. This result holds after adjusting for greenmail premia net of tax effects. Evidence on investment spending suggests firms that pay greenmail differ substantially from their industries, but in a negative direction. In contrast, the industry‐adjusted earnings of non‐greenmail repurchasing firms are significantly greater than the earnings of greenmailed firms. Together, these results are consistent with the contention that greenmailed firms are not managed in shareholders' interests; they underperform their industry, the poor operating results are not attributable to higher investment outlays associated with a long‐term strategic focus, and performance does not improve. This is consistent with observed negative abnormal returns being attributable to both a lost takeover premium and a lost opportunity for improved corporate performance.

Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis

This paper analyses the agency explanation for the cross‐sectional variation of corporate dividend policy in the UK by looking at the managerial entrenchment hypothesis drawn from the agency literature. Consistent with predictions, a significant U‐shaped relationship between dividend payout ratios and insider ownership is observed for a large (exceeding 600 firms) sample of UK companies and two distinct periods. These results strongly suggest the possibility of managerial entrenchment when insider ownership reaches a threshold of around 30%. Evidence is also presented that non‐beneficial holdings by insiders can lead to entrenchment in conjunction with shares held beneficially.

Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis

This paper analyses the agency explanation for the cross-sectional variation of corporate dividend policy in the UK by looking at the managerial entrenchment hypothesis drawn from the agency literature. The agency perspective of dividends asserts that cash payments to shareholders may help to reduce agency problems either by increasing the frequency of external capital raising and associated monitoring by investment bankers and investors (Easterbrook, 1984), or by eliminating free cash-flow (Jensen, 1986). Although other theories have been proposed to explain cross-sectional dividend policy (notably those based on signalling and tax clienteles), the existing empirical literature typically finds that the observed dividend behaviour is consistent with more than a single theory, and therefore usually fails to dismiss alternative explanations. However, the managerial entrenchment hypothesis taken from the agency literature offers a distinctive set of predictions that cannot be found in other competing stories for the explanation of cross-sectional dividend policy behaviour. Consistent with such hypothesis, this paper, using a large (exceeding 600 firms) sample of UK firms and two distinct periods, finds evidence of a strong U-shaped relationship between dividend payouts and insider ownership in the UK. Specifically, these findings show that after a critical entrenchment level estimated in the region of 30%, the coefficient of insider ownership changes from negative to positive. These results strongly suggest the possibility of managerial entrenchment when insider ownership reaches a threshold of around 30%. Evidence is also presented that non-beneficial holdings by insiders (i.e., shares held by insiders on behalf of third parties) can lead to entrenchment in conjunction with shares held beneficially.

Are Golden Parachutes an Optimal Contracting Response or Evidence of Managerial Entrenchment?: Evidence from Successful Takeovers

Two models that attempt to explain the adoption of golden parachutes are examined. The first model views golden parachutes as an optimal contracting response to a takeover, the other perceives them as an outgrowth of severe managerial entrenchment that results in contracts for the benefit of managers. Using a sample of 169 successful acquisitions of NYSE targets from 1981 through 1989, I document that targets that have adopted golden parachutes experience significantly higher excess returns around the announcement of a takeover than targets without these contracts. I find similar increased excess returns for the bidder/target portfolios. In addition, bidder excess return is independent of the existence of golden parachutes in targets. Additional results suggest that golden parachutes do not reduce managerial resistance to takeovers. The results are consistent with the managerial entrenchment hypothesis and inconsistent with the optimal contracting hypothesis. Sensitivity tests confirm these results.

Management commitment to innovation and esop stock concentration

Management commitment to innovation and esop stock concentration

Self-selection and the effects of poison put/call covenants on the reoffering yields of corporate bonds

This study examines the effects of poison put/call covenants on the reoffering yields of corporate bonds issued during 1986 through 1990. The analysis controls for possible biases due to the endogeneity of the decision to issue the bond and the decision to include a poison covenant. The findings indicate that the presence of a single poison call provision has a positive effect on the yield differential, increasing the yield by up to 54 basis points. This is consistent with the managerial entrenchment hypothesis. On the other hand, the inclusion of a poison put provision reduces the yield by 58 to 78 basis points. Furthermore, we find that the imposition of an additional stringent provision to transfer a simple poison put to a super poison put does not significantly decrease the yields further.

New Zealand takeover notice provision selection and share price reaction

By the end of 1995, all publicly listed companies in New Zealand were forced to select one of three takeover notice and defence provisions under rule 4 of the New Zealand Stock Exchange Listing Rules (1995). These three rules vary in their level of restriction and notice. An event study using the market model was used to test for relative support for the Management Entrenchment hypothesis or the Shareholder Interest hypothesis. While the findings are mixed, most support is offered to the Shareholder Interest hypothesis. It is argued that within the New Zealand regulatory environment with few controls on bids, the notice provisions have a positive impact in that they provide time for an auction to take place.