Practice Financial

A large literature has emerged over the past 25 years investigating the impact of takeover provisions on shareholders' wealth.

These provisions essentially impede shareholders' ability to assert control over a firm's assets through the market for corporate control, and researchers have questioned whether the presence of these provisions, on average, is beneficial or deleterious to shareholder wealth. Broadly, the Entrenchment Hypothesis posits that managers exploit the protection afforded by takeover provisions to enjoy perquisite consumption, empire build, or shirk responsibilities. Conversely, the Shareholder Interest Hypothesis posits that the presence of takeover provisions generally benefits shareholders by providing offi cers and directors the ability to thwart under-priced acquisition attempts, extract the highest takeover premia for successful bids, and better align managers' investment horizons to those of long-term shareholders.

The extant literature investigating the relation between innovation and governance suffers from three general shortcomings.

First, much of the literature relies on indirect evidence of innovation efforts such as capital expenditures or accounting-based measures such as R&D, which are subject to reporter discretion.

1 Second, no evidence, of which I am aware, considers the broad portfolio of takeover provisions in the context of innovation, which ignores the potential for interactions among provisions that , Bebchuk and Cohen (2005), Bebchuk et al. (2009), and Danielson and Karpoff (1998, 2006) suggest is important. Finally, many studies fail to address the likely endogenous nature underlying the officers' and directors' decision to adopt takeover protection.

2 In this study, I avoid these limitations by examining the relation between innovation and takeover protection for a sample of 23 firm-