The Effect of Takeover Protection in Quiet Life and Bonding Firms

Shareholders’ updated valuation of internal slack reveals their revised assessment of potential agency conflicts. We study how the value of internal cash changes following state antitakeover regulation events. After carefully addressing the critiques of such experiments, we find that the value of cash increases following antitakeover law implementation, but there is considerable heterogeneity in how the value changes. Firms more susceptible to quiet-life agency problems show no increases in the market-assessed value of internal slack. Conversely, cash appreciates in companies where takeover protection helps bond important commitments with major counterparties. These findings hold across different measures of antitakeover protection events.

[1]  Jonathan M. Karpoff,et al.  The Life Cycle Effects of Corporate Takeover Defenses , 2021, The Review of financial studies.

[2]  Eliezer M. Fich,et al.  Disloyal managers and shareholders’ wealth , 2021, SSRN Electronic Journal.

[3]  Jillian Grennan,et al.  Common Ownership and Startup Growth , 2020, SSRN Electronic Journal.

[4]  Ulrike Malmendier,et al.  CEO Stress, Aging, and Death , 2020, SSRN Electronic Journal.

[5]  Robert J. Schonlau,et al.  Which antitakeover provisions deter takeovers? , 2019, Journal of Corporate Finance.

[6]  Rencheng Wang,et al.  Shareholder Litigation and Corporate Disclosure: Evidence from Derivative Lawsuits , 2017 .

[7]  Yuanzhi Li,et al.  Does Corporate Governance Matter More for High Financial Slack Firms? , 2017, Manag. Sci..

[8]  J. Beňa,et al.  Competition and Ownership Structure of Closely-Held Firms , 2017 .

[9]  Jonathan M. Karpoff,et al.  Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws , 2017 .

[10]  Olivier Dessaint,et al.  Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes , 2016 .

[11]  Jonathan M. Karpoff,et al.  Data Appendix for The Lifecycle Effects of Firm Takeover Defenses , 2016 .

[12]  Todd A. Gormley,et al.  Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts , 2016 .

[13]  Matthew D. Cain,et al.  Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers , 2016 .

[14]  Ian Appel.  Governance by Litigation , 2016 .

[15]  Jarrad Harford,et al.  Precautionary Savings with Risky Assets: When Cash Is Not Cash , 2016 .

[16]  Ling Cen,et al.  Discipline or Disruption? Stakeholder Relationships and the Effect of Takeover Threat , 2015, Manag. Sci..

[17]  Jonathan M. Karpoff,et al.  The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms , 2015 .

[18]  Ronald W. Masulis,et al.  Agency Problems of Corporate Philanthropy , 2014 .

[19]  Lubomir P. Litov,et al.  Staggered Boards and Long-Term Firm Value, Revisited , 2013 .

[20]  Todd A. Gormley,et al.  Common Errors: How to (and Not to) Control for Unobserved Heterogeneity , 2013 .

[21]  Sandy J Klasa,et al.  Refinancing Risk and Cash Holdings , 2013 .

[22]  Julian Atanassov.  Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting , 2012 .

[23]  D. Cohen,et al.  Corporate Governance and the Information Environment: Evidence from State Antitakeover Laws , 2011 .

[24]  Amy K. Dittmar,et al.  The Dynamics of Cash , 2010 .

[25]  R. Whaley,et al.  Common Divisors, Payout Persistence, and Return Predictability , 2009 .

[26]  I. Hasan,et al.  The Effect of State Antitakeover Laws on the Firm's Bondholders , 2009 .

[27]  F. Yu,et al.  The Market for Corporate Control and the Cost of Debt , 2008 .

[28]  R. Duchin.  Cash Holdings and Corporate Diversification , 2008 .

[29]  David J. Denis,et al.  Financial Constraints, Investment, and the Value of Cash Holdings , 2007 .

[30]  Arthur Korteweg.  The Costs of Financial Distress Across Industries , 2007 .

[31]  Holger M. Mueller,et al.  Does Corporate Governance Matter in Competitive Industries? , 2007 .

[32]  Raj Chetty,et al.  Salience and Taxation: Theory and Evidence , 2007 .

[33]  Lee Pinkowitz,et al.  What is the Market Value of a Dollar of Corporate Cash , 2007 .

[34]  Jan Mahrt-Smith,et al.  Corporate Governance and the Value of Cash Holdings , 2007 .

[35]  Sheridan Titman,et al.  Why Do Firms Hold so Much Cash? A Tax-Based Explanation , 2006 .

[36]  Alma Cohen,et al.  What Matters in Corporate Governance? , 2004 .

[37]  Michael W. Faulkender,et al.  Corporate Financial Policy and the Value of Cash , 2004 .

[38]  Nicolas P. B. Bollen,et al.  Modeling the bid/ask spread: measuring the inventory-holding premium ☆ , 2004 .

[39]  S. Mullainathan,et al.  Enjoying the Quiet Life? Corporate Governance and Managerial Preferences , 2003, Journal of Political Economy.

[40]  W. Mikkelson,et al.  Do Persistent Large Cash Reserves Hinder Performance? , 2003, Journal of Financial and Quantitative Analysis.

[41]  Amy K. Dittmar,et al.  International Corporate Governance and Corporate Cash Holdings , 2003, Journal of Financial and Quantitative Analysis.

[42]  Richard S. Ruback,et al.  The Market for Corporate Control: The Scientific Evidence , 2002 .

[43]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[44]  Paul A. Gompers,et al.  Corporate Governance and Equity Prices , 2001 .

[45]  Gerald T. Garvey,et al.  Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage , 1999 .

[46]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[47]  Brad M. Barber,et al.  Improved Methods for Tests of Long-Run Abnormal Stock Returns , 1999 .

[48]  Lee Pinkowitz,et al.  Bank Power and Cash Holdings: Evidence from Japan , 1999 .

[49]  Randall A. Heron,et al.  An Empirical Analysis of the Reincorporation Decision , 1998, Journal of Financial and Quantitative Analysis.

[50]  Sendhil Mullainathan,et al.  Is There Discretion in Wage Setting? a Test Using Takeover Legislation , 1998 .

[51]  René M. Stulz,et al.  The Determinants and Implications of Corporate Cash Holdings , 1997 .

[52]  E. Fama,et al.  Industry costs of equity , 1997 .

[53]  Jarrad Harford,et al.  Corporate Cash Reserves and Acquisitions , 1997 .

[54]  A. Shleifer,et al.  A Survey of Corporate Governance , 1996 .

[55]  G. Schwert,et al.  Poison or Placebo? Evidence on the Deterrent and Wealth Effects of Modern Antitakeover Measures , 1993 .

[56]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[57]  René M. Stulz,et al.  Managerial discretion and optimal financing policies , 1990 .

[58]  Jeremy C. Stein,et al.  Takeover Threats and Managerial Myopia , 1988, Journal of Political Economy.

[59]  Andrei Shleifer,et al.  Breach of Trust in Hostile Takeovers , 1987 .

[60]  H. DeAngelo,et al.  Antitakeover charter amendments and stockholder wealth , 1983 .

[61]  Ingrid M. Werner,et al.  Charles A. Dice Center for Research in Financial Economics Reusing Natural Experiments , 2019 .

[62]  A. Young.  Mostly Harmless Econometrics , 2012 .

[63]  Toni M. Whited,et al.  Endogeneity in Empirical Corporate Finance , 2011 .

[64]  W. Rogers.  Regression standard errors in clustered samples , 1994 .

[65]  René M. Stulz,et al.  Managerial control of voting rights: Financing policies and the market for corporate control , 1988 .

[66]  J. Hicks.  Annual Survey of Economic Theory: The Theory of Monopoly , 1935 .