Passage Of Antitakeover Laws Research Articles

Takeover Protections and Asset Prices

We study the effects of takeover feasibility on asset prices and returns in a unified framework. We show theoretically that takeover protections increase equity risk, stock returns, and bond yields by removing a valuable put option to sell the firm, notably for firms approaching distress. We investigate these claims empirically and find that distressed firms experience a significant decrease in value and increase in returns and market betas after the passage of antitakeover laws, in line with our predictions. At issue bond yields are also higher when an antitakeover law is in effect. Consistent with the model, the effects of antitakeover laws on stock returns, respectively, bond yields, are greater when shareholders, respectively, bondholders, have greater bargaining power. This paper was accepted by Lukas Schmid, finance. Funding: E. Morellec acknowledges financial support from the Swiss Finance Institute. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03111 .

Takeover Protections and Stock Returns

We argue that takeover protections increase equity risk and stock returns by removing a valuable put option to sell equity when firms approach financial distress. We investigate these claims empirically by looking at the risk and return dynamics of distressed firms around the enactment of anti-takeover laws, both domestically and internationally. In line with our predictions, we find that distressed firms experience a significant increase in returns and market betas after the passage of anti-takeover laws. We find no such effects in the full sample of firms.

The catalytic effect of internationalization on innovation

AbstractThis paper examines how internationalization spurs corporate innovation. Internationalization heightens the competitive environment of firms, while increasing financial flexibility. The increased competition reduces agency problems and motivates innovation projects which are supported by improved financial flexibility. We obtain robust evidence with the difference‐in‐differences and instrumental variable approaches. The passage of antitakeover laws and the 1989 Loma Prieta earthquake are treated as exogenous variations to corporate governance; shocks on firm capital supply measured by mutual fund redemptions are also considered. A less positive finding is that internationalization motivates firms to focus on the appropriability of innovation rather than on basic research.

Corporate governance roles of information quality and corporate takeovers

We examine the corporate governance roles of information quality and the takeover market with asymmetric information regarding the value of the target firm. Increasing information quality improves the takeover efficiency however, a highly efficient takeover market also discourages the manager from exerting effort. We find that perfect information quality is not optimal for either current shareholders’ expected payoff maximization or expected firm value maximization. Furthermore, current shareholders prefer a lower level of information quality than the level that maximizes expected firm value, because of a misalignment between current shareholders’ value and total firm value. We also analyze the impact of antitakeover laws, and find that the passage of antitakeover laws may induce current shareholders to choose a higher level of information quality and thus increase expected firm value.

The Catalytic Effect of Internationalization on Innovation

This paper examines how internationalization spurs corporate innovation. Internationalization heightens the competitive environment of firms, while increasing financial flexibility. The increased competition reduces agency problems, and motivates innovation projects which are supported by improved financial flexibility. We obtain robust evidence with difference-in-differences and instrumental variable approaches. The passage of anti-takeover laws and the 1989 Loma Prieta earthquake are treated as exogenous variations to corporate governance; shocks on firm capital supply measured by mutual fund redemptions are also considered. A less positive finding is that internationalization motivates firms to focus on the appropriability of the innovation rather than on basic research.

Corporate Governance and Innovation: Theory and Evidence

AbstractWe develop a theory to show how external and internal corporate governance mechanisms affect innovation. We predict a U-shaped relation between innovation and external takeover pressure, which arises from the interaction between expected takeover premia and private benefits of control. Using ex ante and ex post innovation measures, we find strong empirical support for the predicted relation. We exploit the variation in takeover pressure created by the passage of antitakeover laws across different states. Innovation is fostered either by an unhindered market for corporate control or by antitakeover laws that are severe enough to effectively deter takeovers.

Corporate governance and the information environment: Evidence from state antitakeover laws

We examine the relation between corporate governance and firms' information environments. We use the passage of state antitakeover laws in the U.S. as a source of exogenous variation in an important governance mechanism to identify changes in firms' information environments. We find that information asymmetry and private information gathering decreased and that financial statement informativeness increased following the passage of the antitakeover laws. Cross-sectional analyses indicate that the increased level of financial statement informativeness is attributable to firms that are most likely to access equity markets rather than managerial entrenchment, managerial career concerns, or managers' pursuit of the quiet life.

Corporate Governance and Innovation: Theory and Evidence

We develop a theory to show how external and internal corporate governance mechanisms affect innovation. We show that there is a U-shaped relation between innovation and external takeover pressure, which arises from the interaction between expected takeover premia and private benefits of control. We show strong empirical support for the predicted relation using ex ante and ex post innovation measures. We exploit the variation in takeover pressure created by the passage of anti-takeover laws across different states. Innovation is fostered either by an unhindered market for corporate control, or by anti-takeover laws that are severe enough to effectively deter takeovers.

Board size and firm performance: the moderating effects of the market for corporate control

We examine whether takeover threats affect the importance of board size using the passage of state antitakeover laws enacted in mid-to-late 1980s as our empirical setting. While the Complement Hypothesis predicts that board size matters more before the passage of the laws, the Substitute Hypothesis predicts the opposite. For a sample of 350 Forbes 500 firms over the period 1984–1991, we find a significant association between smaller boards and better firm performance before passage of antitakeover laws, but a much weaker relation (reduced by more than one-third) after the takeover restrictions were in place. Consistent with the Complement Hypothesis, this finding suggests that decreasing board size is more valuable when the market for corporate control is more active.