State Antitakeover Laws Research Articles

Eliciting managerial willingness to invest: A revealed-preference approach

Decision-making entails two underlying economic forces – capacity and willingness of taking on the subject under considerations. Capacity reflects available opportunities and typically weighs benefits against costs of the decision. Willingness pertains to the decision maker’s tolerance for the risk associated with this decision. Compared to capacity, willingness is arguably more primal and much harder to quantify. Our study illustrates a way to divulge managerial willingness by applying a revealed-preference approach toward a large sample of U.S. firms’ investment decisions in the setting of staggered passages of U.S. state antitakeover laws. Our results suggest that takeover threats suppress managerial desire to invest and that governments play a vital role in affecting managerial risk preference, and in turn, corporate strategic choices. Our approach, with modifications and refinements, has the potential of a broad application toward understanding how and under what conditions managerial willingness affects the decision-making processes.

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

How Has Takeover Competition Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed?In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period.First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders.The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.

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.

When does competition mitigate agency problems?

This paper examines how the performance correlation of firms in an industry affects the degree to which product market competition mitigates agency problems. Consistent with theory, I find that in industries with high firm performance correlation, product market competition reduces the adverse effect of business combination (BC) laws on firm operating performance, while in industries with low performance correlation competition does not have such an effect. My results are robust to (i) the use of different measures of performance correlation, competition, and operating performance; (ii) excluding firms that are not exogenously affected by BC laws, (iii) dropping the years that are affected by the first-generation state antitakeover laws. I find similar results for stock prices when examining the stock market reactions to the first newspaper reports of BC laws. Overall, the disciplining effect of competition depends positively on an industry's performance correlation.

Toward a Constitutional Review of the Poison Pill

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate-law landscape. The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills — the most powerful impediment to outside buyers of shares — are also preempted. Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts. Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control.

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.

Antitakeover legislation and accounting conservatism: New evidence

We examine the effect of second-generation state antitakeover laws (ATLs) on accounting conservatism. We adopt a novel methodology that corrects for selection bias resulting from firms’ endogenous incorporation decision. Focusing on the period from when these ATLs became constitutional, we find a negative association between ATLs and conservatism. Our results suggest that ATLs decrease debtholder demand for conservatism by reducing agency costs of debt.

How Has the Corporate Takeover Market Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed?. In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period. First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders. The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.

Takeover protection and stock price crash risk: Evidence from state antitakeover laws

We exploit the passage of state antitakeover laws to examine the relation between takeover protection and stock price crash risk. We find that firms incorporated in states that passed the laws are negatively associated with future stock price crash risk in the post-law periods, suggesting that takeover protection mitigates bad news hoarding activities. Further analysis shows that the mitigating effect is more pronounced when firms have severe information asymmetry or face strong product market competition. Together, our findings shed new light on the impact of takeover threats on managerial incentives to engage in bad news hoarding.

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.

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.

Toward a Constitutional Review of the Poison Pill

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate-law landscape. The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills — the most powerful impediment to outside buyers of shares — are also preempted. Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts. Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control.

The Market for Corporate Control and Accounting Conservatism

This study explores the governance role of accounting conservatism by investigating changes in financial reporting conservatism before and after the passage of state anti-takeover laws. Passage of these laws introduced an exogenous shock to the takeover threat faced by firms and constitutes a natural experiment for investigating the relation between financial reporting and governance free of endogeneity concerns. Employing a difference-in-differences methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover legislation consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resulting increase in conservatism is greater for firms operating in less competitive industries, firms with superior managers, and firms with lower institutional ownership. This evidence sheds light on how the financial reporting system interacts with corporate governance mechanisms in alleviating potential agency problems. *Callen is at the Rotman School of Management, 105 St. George St., Toronto, M5S 3E6, Canada. Ph. 416-946-5641. e-mail :callen@rotman.utoronto.ca. Corresponding Author. **Guan is at the Faculty of Business, City University of Hong Kong, Kowloon, Hong Kong SAR, China. email:yyguan@cityu.edu.hk. ***Qiu is at the Degroote School of Business, McMaster University, and 1280 Main St., Hamilton, L8S 4L8, Canada. email: qiu@mcmaster.ca.

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.

Product market competition and the cost of bank loans: Evidence from state antitakeover laws

The extant literature documents a positive relationship between a firm’s takeover vulnerability and its agency cost of debt. Using state antitakeover laws as an exogenous measure of variation in takeover vulnerability, I investigate whether product market competition has a disciplinary effect that can lower a firm’s cost of bank loans. After taking into account the industry composition of borrowers, I find that banks charge higher spreads to borrowers that are vulnerable to takeovers, but only in concentrated industries. In the absence of disciplinary competitive pressure, the effect of takeover vulnerability on the cost of bank loans is mitigated for larger firms, firms followed by analysts, firms with existing credit ratings, non-family firms, and for borrowers with shorter maturity loans or loans with covenants and collateral in place. Taken together, the results suggest that the effect of governance on the cost of financing is not homogenous across all industries, and that concentrated industry firms may need to use supplementary governance mechanisms to mitigate debt holder agency problems.

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.

Antitakeover Provisions and Shareholder Wealth: A Survey of the Literature

We survey theoretical and empirical research on antitakeover provisions, focusing on the relationship 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.

What Do Private Equity Firms Look for in an Investment? Target Governance Provisions and Going Private Transactions

I examine the role of governance characteristics in determining the probability of a firm undergoing a going private transaction. I find that firms with greater board control are more likely to go private while firms with strong anti-takeover provisions are more likely to be acquired by other public companies. The positive relationship between greater board control and the likelihood of going private is driven by private equity backed deals. On the other hand, the negative relationship between anti-takeover provisions and the probability of going private is driven by non private equity backed deals. In addition, I find that shareholder voting restrictions do not affect firms’ survival status while a higher number of state antitakeover laws reduces the likelihood of being acquired. Finally, abnormal returns to shareholders are much lower for going private transactions than for acquisitions by public firms. The results suggest that governance provisions affect shareholder wealth during change of control transactions by playing an important role in determining the type of acquirer.