The Impact of Takeover Defenses on Managerial Discipline and Takeover Activity

The Impact of Takeover Defenses on Managerial

Discipline and Takeover Activity

JEAN-BAPTISTE HECQUET*

ABSTRACT

The effects of antitakeover amendments have shown conflicting results in

the literature. This paper investigates the impact of takeover defenses on

managerial discipline, premiums and takeover activity. If takeover defenses

seem to discipline IPO managers, the evidence is consistent with the

hypothesis that antitakeover techniques only serve the self-interests of

managers of mature companies. Furthermore, the study does not support that

antitakeover amendments have any impact on takeover premiums and shows

that the presence of defenses is negatively related to takeover activity. The

empirical analysis conducted on white knights premiums leads to the same

conclusion. Thus, shareholders do not benefit from antitakeover techniques

and takeover defenses fail to properly answer the agency problem.

AFTER MANY YEARS OF RESEARCH on the impact of takeover defenses on

shareholders’ wealth, there is still little consensus on the conclusions of such a

topic. For instance, DeAngelo and Rice (1983) report statistically insignificant

negative abnormal return surrounding the amendments proposals while Mc

Williams (1990) finds significant positive effect for firms having low levels of

managerial share ownership (ten percents or less) which is significantly larger

than negative effects observed at higher level of share ownership. However, if

Sundaramurthy, Mahoney and Mahoney (1997) find a negative market

reaction to antitakeover provisions, they show no statistically significant stock

price effect of inside ownership. Moreover, they find that the market reacts

more negatively to antitakeover provisions adopted by outsider-dominated

boards than to antitakeover adopted by boards with fewer outsiders which is

* Specialized Master in Finance, ESCP Europe. This paper is based on a dissertation written at

ESCP Europe. I would like to thank