Abstract:We 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… Show more
“…Third, we contribute to literature on antitakeover strategies in three important ways. We challenge the dominant perspective suggesting that provisions insulating managers from takeovers are contractually inefficient (Straska & Waller, ). Our findings show that, as far as founder‐CEOs are concerned, long run CEM benefits are larger than potential agency costs.…”
Section: Discussioncontrasting
confidence: 66%
“…Upward price adjustments should be small as agency costs induced by CEMs are nonexistent in those firms, and hence all else equal, investors are unlikely to require a large initial discount on IPO value to invest. Downward price adjustments may also occur over the long run as founder‐CEOs who do not use multiple CEMs lack the means to address effectively myopic and underinvestment problems described earlier (Straska & Waller, ). Thus: Hypothesis 2 (H2) There is a positive relationship between the number of CEMs used by founder‐CEOs and post‐IPO stock returns.…”
Research Summary: To prevent loss of control post‐IPO, founder‐CEOs can implement control‐enhancing mechanisms disconnecting ownership from voting rights. However, this decision places them in a rich versus king dilemma. If they choose to implement such mechanisms and secure the king position, they risk losing money at IPO. If they choose not to implement control‐enhancing mechanisms and adopt the rich position they risk losing control over the firm. We investigate theoretically and empirically the outcomes of this dilemma in a multi‐period setting (at IPO and post‐IPO). We found that the majority of founder‐CEOs who choose the king option recover initial wealth loss, and hence, they can reconcile the rich and king paths in the long‐run post‐IPO.
Managerial Summary: Founder‐CEOs often use control‐enhancing mechanisms (CEMs), such dual class shares, pyramid control structures, and pact agreements, to maintain control over their IPO firms. In this study, we investigate the effects of these CEMs on firm value at IPO and post‐IPO using a unique hand‐collected dataset comprising all founder‐CEO led firms that went public on French regulated markets between January 1992 and December 2010. We found that most founder‐CEOs who use multiple CEMs leave considerable amounts of money on the table at IPO date but they are able to recover their initial loss 5 years post‐IPO. This result suggests that an IPO may constitute a valuable financing alternative even for founder‐CEOs who value control.
“…Third, we contribute to literature on antitakeover strategies in three important ways. We challenge the dominant perspective suggesting that provisions insulating managers from takeovers are contractually inefficient (Straska & Waller, ). Our findings show that, as far as founder‐CEOs are concerned, long run CEM benefits are larger than potential agency costs.…”
Section: Discussioncontrasting
confidence: 66%
“…Upward price adjustments should be small as agency costs induced by CEMs are nonexistent in those firms, and hence all else equal, investors are unlikely to require a large initial discount on IPO value to invest. Downward price adjustments may also occur over the long run as founder‐CEOs who do not use multiple CEMs lack the means to address effectively myopic and underinvestment problems described earlier (Straska & Waller, ). Thus: Hypothesis 2 (H2) There is a positive relationship between the number of CEMs used by founder‐CEOs and post‐IPO stock returns.…”
Research Summary: To prevent loss of control post‐IPO, founder‐CEOs can implement control‐enhancing mechanisms disconnecting ownership from voting rights. However, this decision places them in a rich versus king dilemma. If they choose to implement such mechanisms and secure the king position, they risk losing money at IPO. If they choose not to implement control‐enhancing mechanisms and adopt the rich position they risk losing control over the firm. We investigate theoretically and empirically the outcomes of this dilemma in a multi‐period setting (at IPO and post‐IPO). We found that the majority of founder‐CEOs who choose the king option recover initial wealth loss, and hence, they can reconcile the rich and king paths in the long‐run post‐IPO.
Managerial Summary: Founder‐CEOs often use control‐enhancing mechanisms (CEMs), such dual class shares, pyramid control structures, and pact agreements, to maintain control over their IPO firms. In this study, we investigate the effects of these CEMs on firm value at IPO and post‐IPO using a unique hand‐collected dataset comprising all founder‐CEO led firms that went public on French regulated markets between January 1992 and December 2010. We found that most founder‐CEOs who use multiple CEMs leave considerable amounts of money on the table at IPO date but they are able to recover their initial loss 5 years post‐IPO. This result suggests that an IPO may constitute a valuable financing alternative even for founder‐CEOs who value control.
“…However, states have adopted at least 136 antitakeover laws since 1985, and firms have not abandoned defenses other than classified boards. Indeed, Straska and Waller (2014) document that most types of defenses have become more-not less-widespread since the late 1980s. The use of takeover defenses has increased especially among initial public offering (IPO) firms (e.g., see Daines and Klausner (2001), Field and Karpoff (2002), Johnson, Karpoff, and Yi (2015)).…”
Section: Comments On An Extreme View Of Shadow Poison Pillsmentioning
We 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.
“…Takeover regulation has attracted the attention of policymakers, managers, investors and academics alike since the early 1980s (e.g., Souther, 2015;Straska and Waller, 2014;Cuñat et al, 2012;Bris and Cabolis, 2008;Martynova and Renneboog, 2008a;Rossi and Volpin, 2004;Nenova, 2003;DeAngelo and Rice, 1983;Grossman and Hart, 1980). Takeover law regulates the market for corporate control and -because of the potential of takeovers to generate synergistic gains and redistribute wealth in society -it defines the rights and obligations of the acquiring and target firm such as the requirements of information disclosure, the orderly process of the offer, the terms of the bid, and the defensive measures available to target managers.…”
Section: Literature Review and Hypothesis Developmentmentioning
We construct a dynamic takeover law index using hand-collected data on legal provisions and empirically examine the effect of takeover regulation to protect shareholders on shareholder wealth for bidders and targets in a multi-country setting. We find that a stricter takeover law increases combined wealth for bidders and targets, which suggests that stronger shareholder protection in the takeover bid process increases the efficiency of the takeover market. Contrary to our hypothesis, results show that stricter takeover law does not hurt bidders. Its effect on target announcement returns and takeover premiums is significantly positive and economically large. Our findings suggest that the mandatory bid rule and ownership disclosure increase synergistic gains in takeovers, whilst the fair-price rule and squeeze-out rights may reduce combined gains. Further results show that increased overall gains can be explained by greater competition in the market for corporate control and a shorter time to successful completion of a takeover under stricter takeover law.
KeywordsTakeover laws, Mergers and acquisitions, Shareholder protection, Announcement returns, EU takeover directive JEL classification G32, G34, G38, K22, O16
AcknowledgementsWe thank
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