State Antitakeover Research Articles

Do State Antitakeover Provisions Matter?

Do State Antitakeover Provisions Matter?

The Effect of State Antitakeover Laws on Corporate Tax Avoidance

We examine the implications of enhanced managerial control afforded by state anti-takeover laws for tax avoidance and find the strength of anti-takeover statutes in a state is negatively related to tax avoidance of firms incorporated in that state. In testing underlying mechanisms, we find that the empirical results support the price discount concern hypothesis (i.e., managers refrain from tax avoidance activities to prevent potential stock price discounts induced by heightened investor perception of tax-related rent extraction in firms with severe agency problems). By contrast, the results are inconsistent with the quiet life hypothesis (i.e., managers entrenched by state anti-takeover protection enjoy the quiet life by under-investing in tax planning opportunities). Our findings are generally consistent with the takeover market phenomenon that one of managers' concerns lies in their inability to re-contract away the adverse consequences of perceived agency problems arising from state anti-takeover protection.

The Effect of State Antitakeover Laws on Corporate Tax Avoidance

The Effect of State Antitakeover Laws on Corporate Tax Avoidance

Do Takeover Threats Suppress Corporate Willingness to Invest? Evidence from State Antitakeover Legislations

We use a revealed-preference approach to assess the impact of the exogenous relief in takeover threats, proxied by the staggered passages of state antitakeover laws, on corporate willingness to invest. By estimating an augmented investment Euler equation, we find that firms, particularly those are small, belonging in competitive industries, and bearing severe agency problems, apply lower discount rates to their investments after the legislations. The results hold up to addressing several legal and institutional aspects of the legislations. Using high-order moment estimators, we find that the investment-q sensitivities of affected firms, especially of those experiencing sharper discount rate declines, increase after the passage of the laws. Our results suggest that takeover pressure suppresses corporate desire to invest.

Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

ABSTRACTWe argue and demonstrate empirically that a firm's institutional and legal context has first‐order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm‐level takeover defenses, and (iii) the legal regime as reflected by important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies related to nine different outcome variables change substantially when we include controls for these considerations.

Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

We argue and demonstrate empirically that institutional and political economy considerations have first-order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law’s effect on a firm’s takeover protection depends on (i) other state antitakeover laws, (ii) pre-existing firm-level takeover defenses, and (iii) the legal regime as reflected in important court decisions. In addition, (iv) state antitakeover laws are identifiably not exogenous for many firms. We show that the inferences from nine prior studies relating to nine different outcome variables change substantially when we include controls for these considerations.

Citizens United, Independent Expenditures, and Agency Costs: Reexamining the Political Economy of State Antitakeover Statutes

We test the agency theory of corporate political activity by examining the association between the legality of independent expenditures and antitakeover lawmaking in the US states. Exploiting changes in state law regarding the use of corporate independent expenditures in the pre-Citizens United era, we estimate that a state is more likely to pass antitakeover statutes that entrench management when firms are allowed to make independent expenditures. We also find that this relationship is conditional on the competitiveness of a state’s electoral environment, suggesting that the threat of independent expenditures may move vulnerable legislators’ votes on less salient issues, such as corporate governance. These findings are robust to competing public interest and political economy explanations for antitakeover lawmaking, and they reveal that allowing independent expenditures may create additional agency costs for owners through public policy. Finally, these results strongly challenge the claim that state-level antitakeover laws are exogenous to firms’ activities. (JEL D72, G38, K20)

Corporate Governance and the Asymmetrical Behavior of Selling, General and Administrative Costs: Further Evidence from State Antitakeover Laws

While both the economic and agency theory have been proposed to explain cost stickiness, Chen, Lu, and Sougiannis (2012) is the first study that provides evidence to support the agency explanation. To address the endogeneity concern, we extend Chen et al. (2012) by employing state antitakeover laws (ATLs) as an exogenous shock to the corporate governance environment and examine whether the behavior of selling, general and administrative (SG&A) costs changes around the passage of the ATLs. Using the difference-in-differences methodology, we report two primary findings. First, when sales increase, SG&A costs increase significantly more after the enactment of the ATLs, which is consistent with the ATL literature that managers enjoy the “quiet life” after being insulated from an active takeover market. Second and more importantly, we do not find evidence to suggest that managers reduce SG&A costs less in response to sales decline after the passage of the ATLs, which is inconsistent with the agency explanation of cost stickiness. These results hold in settings where we expect the effect of ATLs to be stronger and are robust to sensitivity analyses. Although we would not rule out the agency explanation, our study does cast doubt on the explanation and calls for further research into the reasons behind cost stickiness.

State Antitakeover Laws and Voluntary Disclosure

AbstractWe test the relationship between takeover protection and voluntary disclosure in a setting of antitakeover laws in a firm’s state of incorporation. After correcting for the endogeneity of firms’ incorporation choices, we find that firms incorporated in states with more antitakeover laws have higher levels of voluntary disclosure and stock market liquidity. Further tests do not support shareholder demands being the driving force for this association. Our findings are consistent with takeover protection and poor disclosure serving as substitute mechanisms for deterring takeovers. Therefore, as antitakeover statutes mitigate takeover threats, they enhance managers’ incentives to disclose more in order to realize capital market benefits.

Citizens United, Independent Expenditures, and Agency Costs: Reexamining the Political Economy of State Antitakeover Statutes

We test the agency theory of corporate political activity by examining the association between the legality of independent expenditures and antitakeover lawmaking in the U.S. states. Exploiting changes in state campaign finance law regarding the use of corporate independent expenditures in the pre-Citizens United era, we estimate that a state is more likely to pass antitakeover statutes that entrench management when firms are allowed to make independent expenditures to influence electoral campaigns. We also find that this relationship is conditional on the competitiveness of a state’s electoral environment, suggesting that the threat of independent expenditures may move vulnerable legislators’ votes on less salient issues, such as corporate governance. These findings are robust to competing public interest and political economy explanations for antitakeover law adoption, and they reveal that allowing independent expenditures may create additional agency costs for owners through public policy. Finally, these results strongly challenge the claim that state-level antitakeover laws are exogenous to firms’ activities.

Earnings Quality Effect of State Antitakeover Statutes

Earnings Quality Effect of State Antitakeover Statutes

The Effect of State Antitakeover Laws on the Firm's Bondholders

We examine how state antitakeover laws affect bondholders and the cost of debt, and report four findings. First, bonds issued by firms incorporated in takeover friendly states have significantly higher at-issue yield spreads than bonds issued by firms in states with restrictive antitakeover laws. Second, firms in takeover friendly states have significantly higher leverage than their counterparts in restrictive law states. Third, bond issues are associated with negative average stock price reactions among firms in takeover friendly states, but positive stock price reactions among firms in restrictive law states. And fourth, existing bond values increase, on average, upon the introduction of Business Combination antitakeover law. These results indicate that state antitakeover laws tend to decrease bond yields and increase bond values – the opposite of their effect on equity values. This, in turn, implies that state laws help mitigate the agency cost of debt by shielding bondholders from expropriation in takeovers. Overall, the empirical evidence suggests that the effect of antitakeover provisions on firm value must take into account the impacts of both bondholders and stockholders.

Campaign Finance Laws and Political Efficacy: Evidence from the States

The decline of political efficacy and trust in the United States is often linked to the rise of money in politics. Both the courts and reform advocates justify restrictions on campaign donations and spending as necessary for the improvement of links between the government and the governed. We conduct the first test of whether campaign finance laws actually influence how citizens view their government by exploiting the variation in campaign finance regulations both across and within states during the last half of the 20th century. Our analysis reveals no large positive effects of campaign finance laws on political efficacy. Public disclosure laws and limits on contributions from organizations are in some cases associated with modest increases in efficacy, but public financing is associated with a similarly modest decrease in efficacy. ∗Previous versions of this paper were presented at the 2003 Annual Meeting of the American Political Science Association and 2003 Annual Meeting of the Midwest Political Science Association. We thank Barry Burden, Dick Niemi, the editors, and anonymous reviewers for helpful comments. Thanks also to Matt Jacobsmeier and Matt Stiffler for research assistance. †Department of Political Science, University of Rochester, Harkness Hall, Rochester, NY 146270146; 585-273-4779; david.primo@rochester.edu; Fax: 585-271-1616 ‡Department of Economics and Truman School of Public Affairs, University of Missouri, 118 Professional Building, Columbia, MO 65211; 573-882-5572; milyoj@missouri.edu; Fax: 573-882-2697

Firm Size, Antitakeover Charter Amendments, and the Effect of State Antitakeover Legislation

This study investigates the impact of state antitakeover legislation on the market value of affected firms and considers the role that both acquisition attractiveness, as measured by firm size, and antitakeover amendments play in the market reaction. When separating the sample by size and by the presence of amendments, small firms display a negative reaction to the legislation, large firms show no reaction, firms without amendments react negatively, and there is a positive reaction for firms with amendments. When separating the sample on the basis of both dimensions, small firms without amendments, the most attractive acquisition targets, experience a significant, negative market response. Large firms with amendments, the least attractive group, are positively affected. The two intermediate groups are not significantly affected.

Evidence of Market Overreaction to State Antitakeover Legislation

The rise in hostile corporate takeover attempts during the 1980s motivated many states to pass antitakeover legislation, often after lobbying by the management of affected firms. Empirical attempts to assess the impact of such statutes on firm value have yielded mixed results finding either no effect or a significant negative effect. We hypothesize that, while there may be a negative market reaction associated with state antitakeover legislation, the effect is temporary. In empirically examining the effects from the actions of nineteen states, we find that any negative market reactions tend to be followed by roughly equal positive counter‐reactions, suggesting a market overreaction.

Who Opts out of State Antitakeover Protection?: The Case of Pennsylvania's SB 1310

In 1990, Pennsylvania enacted Senate Bill 1310, containing five provisions designed to make takeovers prohibitively expensive but allowing firms to opt out of some or all of the law's provisions. We find that firms that opted out of SB 1310 had lower insider control of voting rights and were less likely to have a poison pill in place prior to the law's enactment, even after controlling for firm size and the monitoring activities of blockholders and outside directors. In addition, we find that opt-out firms spent less on R&D than non-opt-out firms. Our result suggest that some boards value takeover defense (whether firm or state-level) whereas others prefer to be subject to an active market for corporate control.

Shark Repellents and Managerial Myopia: An Empirical Test

Since the proxy fights of the 1950s, commentators have debated the welfare implications of corporate takeovers. Although observers such as Manne (1965), Jensen and Meckling (1976), Fama (1980), and Jensen and Ruback (1983) argue that the market for corporate control promotes efficiency and enhances wealth, some critics, such as managers of firms subject to hostile takeover attempts, contend that takeovers destroy firm value. The critics frequently assert that takeover pressure forces managers to sacrifice profitable, but slowyielding, long-term investments in favor of less productive short-term investments that offer immediate returns. While the evidence supporting takeover-induced shortsightedness is largely anecdotal, a recent paper by Stein (1988) develops a formal

The Literature of Economics: The Case of Berle and Means

THERE are not many books fifty years old whose central argument is identified for modern economists simply by naming the work, but Berle and Means's The Modern Corporation and Private Property is surely one. Every schoolboy, as Macaulay would say, knows that they discovered or asserted or proved or were otherwise joined to the proposition that ownership and control have been separated in the large corporation. Moreover this separation had large, but not easily recalled, effects on the conduct of corporate enterprise. This essay will examine the reception of this book, particularly by the economics profession, in its first decade. Our interest will be not so much in the novelty or validity of the book's message as in how it was understood and received. The process by which a proposition of great potential scientific and political significance gets established in a discipline is fascinatingly mysterious. Our investigation will support the view that doctrines and theories congenial to an intellectual milieu are accepted quickly and widely, although not necessarily as uncritically as the work of Berle and Means was accepted.

State Law, Shareholder Protection, and the Theory of the Corporation

THIS spring the Supreme Court rejected a claim that the anti-fraud provisions of the Securities Exchange Act' impose a general fiduciary duty on those who control a corporation to act fairly toward minority interests.2 This decision, rejecting attempts to expand federal authority over internal corporate affairs through interpretation and thereby limiting the federal role to preventing fraud in securities transactions, may well increase the demands for major federal regulatory legislation governing the shareholdercorporation relationship. It is almost universally the opinion of academic commentators that state corporation codes do not impose sufficiently stringent controls on corporate management and are lax in protecting shareholders. Only federal intervention, it is said, can correct this sorry situation. This article will test the intellectual underpinnings of the conventional wisdom and of the rather venerable proposals calling for the federal regulation of the governance of corporations3 against an economic theory of corporate function and control. It will conclude both that state corporate legal systems are