The effect of takeover defenses on the dividend decision

Many firms have sought protection from hostile takeovers by passing defensive amendments to their corporate charter and/or lobbying their state legislatures for statutory protection. Agency theory would suggest that any such takeover defenses alter the principal-agent relationship. A consequence of such a change may be a change in corporate decision making. The objective of this research is to test the effect that passage of antitakeover amendments has on a firm's dividend policy. We use six alternate measures of dividend activity: total dividends paid, dividends per share and dividends relative to earnings, cash flow, market value, and book value. Our results indicate that firms that adopt antitakeover amendments, when compared to an industry control sample, tend to have a slower rate of growth in dividend payout as measured by the proxy variables. These results suggest that entrenchment is not a likely outcome of such amendments.     

The effects of corporate antitakeover provisions on long-term investment: empirical evidence

This paper's empirical results indicate that the average effect of antitakeover provisions on subsequent long‒term investment is negative. The interpretation of these results depends on whether one thinks that there was too much, too little, or just the right amount of long‒term investment prior to the antitakeover provision adoption. We use agency theory to devise more refined empirical tests of the effects of antitakeover provision adoption by managers in firms with different incentive and monitoring structures. Governance variables (e.g. percentage of outsiders on corporate boards, and separate CEO/chairperson positions) have an insignificant impact on subsequent long‒term investment behavior. However, consistent with agency theory predictions, managers in firms with better economic incentives (higher insider ownership) tend to cut subsequent long‒term investment less than managers in firms with less incentive alignment. Furthermore, managers in firms with greater external monitoring (due to higher institutional ownership) also tend to cut subsequent long‒term investment less than managers in firms with less external monitoring. Thus, the decrease in subsequent long‒term investment is significantly less for firms where the managers have greater incentives to act in shareholders' interests. Finally, there are interesting effects of the control variables. First, high book equity/market equity firms cut total long‒term investment more. Second, firms that were takeover targets or rumored to be takeover targets cut long‒term investment more. These results suggest that inefficient firms cut long‒term investment more when an antitakeover provision is adopted. © 1997 John Wiley & Sons, Ltd.     

Institutional investors, antitakeover defenses and success of hostile takeover bids

In this study we investigate the question of whether institutional investors enhance or reduce efficiency in the market for corporate control. In particular, given unequivocal evidence that target stockholders gain in successful takeover bids, we investigate the impact of institutional ownership in target firms on the adoption of the type of antitakeover defense as well as the outcome of takeover bids. We find that target firms are more likely to adopt value-reducing antitakeover defenses and successfully thwart takeover bids when a higher percentage of target common stock is owned by ‘pressure-indeterminate’ investors (investment counsel firms in particular). On the other hand, the probability of a successful takeover rises with the ownership of both ‘pressure-sensitive’ and ‘pressure-resistant’ investors. The above findings support the view that institutional investors do not play a homogeneous role in the market for corporate control.     

ESOPs, takeover protection, and corporate decision-making

ESOPs have the potential to align the interests of employees and owners and may increase firm value. However, employee ownership may also strengthen the position of entrenched management. The literature predicts that firms newly protected from takeover threat will tend to (1) increase long-term investment and (2) require additional external monitoring, and/or (3) may use leverage as part of an overall antitakeover strategy. We examined firms that have adopted ESOPs and find that firms raise the level of capital expenditures, research and development expenditures, and dividends. (JEF G320)     

An analysis of foreign takeovers in the United States

Using a sample of 96 US companies taken over by foreign companies during the period 1975-87, we assess foreign takeovers in two stages: pre-takeover and takeover. We find evidence that foreign firms target US firms whose operations are related to their own operations and that have low market-to-book ratios, suggesting foreign bidders acquire firms that provide a greater opportunity for market entry and synergistic gains. The synergistic gains appear to result from the foreign buyer using its own intangible assets (e.g. managerial skills) to improve the target. We also find that foreign takeover activity is aimed primarily at US industries that themselves make high levels of foreign direct investments, implying that the bidders use takeovers as a quick way to counteract rival firms' moves. We find evidence that foreign takeovers take place in relatively mature, low-growth industries and that foreign targets are, on average, smaller than the non-targets. The wealth effect on the announcement of a takeover is significantly higher for foreign takeovers than for takeovers by domestic firms. Also, we find that foreign bidders pay a slightly higher premium for targets whose operations are related to their own.     

Do firm and state antitakeover provisions affect how well CEOs earn their pay?

The relationship between CEO pay‐adjusted firm performance and firm‐specific antitakeover amendments and state antitakeover laws is examined. The findings suggest that the potential entrenchment resulting from the reduced threat of external control provided by antitakeover provisions may allow the CEO to deliver a lower level of firm performance relative to their compensation. At first glance, the state antitakeover provisions appear to be insignificant in the presence of firm‐specific amendments. However, further analysis reveals they can play an important role, in some cases reinforcing the effects of the firm‐specific amendments. With respect to the firm‐specific amendments, the negative relation is associated with the presence of blank check preferred stock and poison pill amendments. Copyright © 2000 John Wiley & Sons, Ltd.     

The Massachusetts Classified Board Law

This study investigates the impact of the Massachusetts Classified Board Law on shareholder wealth. This state law is the first law to explicitly require a change in the structure of the board of directors of every firm within the state. In addition, restrictive rules on replacing members of the board of directors enable directors to insulate themselves from takeover attempts. We find this law decreased share values by 16 percentage points for firms without anti-takeover amendments. However, firms with a golden parachute outperformed firms without golden parachutes by 23 percent. This supports the hypothesis that financial markets consider many firm characteristics when evaluating the impact of state anti-takeover legislation. The management entrenchment hypothesis is supported for firms without prior anti-takeover charter amendments. The shareholder interest hypothesis is supported for firms with golden parachutes.     

Defensive acquisitions in the banking industry: The takeover premium hypothesis

We define defensive acquisitions as takeovers made by a firm so as to become so large that it becomes an unattractive target itself. A sample of defensive acquisitions in the banking industry is used to test the takeover premium hypothesis. Under this hypothesis, the defensive acquirers lose because a takeover premium that previously existed in their prices is deflated while the takeover premium increases for smaller competitors because they become more likely targets. We find that the defensive acquirers experience significant negative abnormal returns on the announcement day, and that smaller competitors have positive abnormal returns on the announcements of defensive acquisitions. In contrast, larger competitors do not react to the announcements. The results are consistent with the takeover premium hypothesis.     

The impact of anti‐takeover charter amendments on expectations of future earnings and takeover activity

In this study, additional evidence of the impact of anti‐takeover amendments on firm earnings and subsequent takeover activity is presented. It is found that analysts’ projections of financial performance measures do not appear to be altered by the adoption of anti‐takeover amendments. Additionally, it is found that the anti‐takeover charter amendments do not impact either takeover activity or takeover premiums following their adoption. Thus, anti‐takeover amendments appear to have few, if any, consequences to shareholders. Copyright © 1999 John Wiley & Sons, Ltd.     

Shark repellents and the role of institutional investors in corporate governance

This paper examines the role of institutional shareholders in monitoring managers when they propose antitakeover charter amendments (shark repellents). These proposals provide a rare opportunity to examine this issue since they can be adopted only by shareholder approval. We document a positive relationship between the ownership of institutional shareholders and the stock market reaction to the announcement of antitakeover amendments. This finding is consistent with the Demsetz (1983) and Shleifer and Vishny (1986) proposition that large blockholders reduce the free-rider problem associated with monitoring managers.     

Value Added and Corporate Control in the U.S.

This paper examines the ability of value added to assess the differences between target firms and their industries and to explain target firms' abnormal returns during the takeover period. In a sample of 234 completed takeovers over the period 1977 to 1989, takeover targets have lower value added to total assets ratios than other firms in their industries in the year preceding the year in which the takeover is completed. Target firm abnormal returns observed during the takeover period are positively related to the difference between target Firm and average industry value added to total assets. This suggests that while acquired firms are on average underperformers, acquiring firms value the access to, and possibly the ability to redistribute, the resources of target firms.     

Takeover prediction using forecast combinations

The ability to identify likely takeover targets at an early stage should provide investors with valuable information, enabling them to profit by investing in potential target firms. In this paper we contribute to the takeover forecasting literature by suggesting the combination of probability forecasts as an alternative method of improving the forecast accuracy in takeover prediction and realizing improved economic returns from portfolios made up of predicted targets. Forecasts from several non-linear forecasting models, such as logistic and neural network models and a combination of them, are used to determine the methodology that best reduces the out-of-sample misclassification error. We draw two general conclusions from our results. First, the forecast combination method outperforms the single models, and should therefore be used to improve the accuracy of takeover target predictions. Second, we demonstrate that an investment in a portfolio of the combined predicted targets results in significant abnormal returns being made by an investor, in the order of up to double the market benchmark return when using a portfolio of manageable size.     

The Determinants and Consequences of Abandoned Takeovers

Takeover activity has attracted a great deal of academic attention over the past three decades. Much of this interest has focused on the study of completed takeovers with a particular interest in seeking to understand the impact of takeover activity on the wealth of both shareholders in acquired and bidding firms. Unlike their completed counterparts, abandoned takeovers have received relatively little academic attention. This is surprising since a significant proportion of takeover bids are unsuccessful. This paper seeks to address the imbalance by providing a comprehensive survey of the takeover failure literature. The paper focuses on two aspects of the literature: First, we discuss and review the factors likely to influence takeover outcome. Second, we examine the consequences of takeover abandonment from the perspective of targets and bidders. We also identify a number of areas where future research may seek to improve further our understanding of the causes and consequences of takeover abandonment.     

The differential impact on stockholder wealth of various antitakeover provisions

This paper examines the relationship between the passage of six types of corporate antitakeover provisions (supermajority, classified boards, fair-price, reduction in cumulative voting, anti-greenmail and poison pills) and stockholder wealth. Our event study from a sample of 381 firms that adopted 486 antitakeover provisions in the 1984 to 1988 period indicates a strongly negative effect on stockholder wealth, supporting the management entrenchment view of the antitakeover provisions. Moreover, the empirical results of this paper indicate that the market reacts equally negatively to both non-operating provisions that require stockholder approval and to operating provisions that do not require stockholder approval. However, separate analyses of the antitakeover provisions provide some support for the argument that stockholders discriminate between individual provisions.     

Investment banks advising takeover targets

Should takeover target firms hire top-tier investment bank advisors? For a sample of mergers and acquisitions between publicly traded U.S. acquirers and targets, in deals in which targets hire top-tier banks, targets earn higher premiums and abnormal returns; the probability of stock payment is lower, especially when bidder stock is potentially overvalued; acquirers, however, do not necessarily earn lower abnormal returns, and combined returns are higher. Controlling for self-selection does not erode, but, in some cases even strengthens the results. The evidence suggests that top-tier investment banks advising targets benefit shareholders of client firms by making better deals, instead of simply bargaining against the acquirers. The findings shed light on the role of advisor incentives when linking advisor quality and shareholder wealth.     

Location,Proximity, and M&A Transactions

In this paper, we examine how the geographic location of firms affects acquisition decisions and value creation for acquirers in takeover transactions. We find that firms located in an urban area are more likely to receive a takeover bid and complete a takeover transaction as a target than firms located in rural areas, and takeover deals involving an urban target are associated with higher acquirer announcement returns, after controlling for the proximity between the target and the acquirer. In addition, a target's urban location significantly attenuates the negative effect of a long distance between the target and the acquirer on acquirer returns, a fact that is documented in the existing literature. Our findings reveal a previously underexplored force—firm location—that can affect takeover transactions, in addition to proximity. Our paper suggests that a firm's location plays an important role in facilitating the dissemination of soft information and enhancing information‐based synergies.     

Capital expenditure announcements and anti-takeover barriers

In this paper, we compare capital budget announcements by firms with anti-takeover mechanisms in place to announcements by firms without takeover barriers during the period 1980 to 1995. We find that anti-takeover provisions do not affect investors’ average reactions to investment choices. Market responses are heterogeneous; however, and differ according to size, growth opportunity, the availability of free cash flow and exposure to the capital markets. We find evidence consistent with managerial entrenchment when firms are insulated from the threat of takeover and have enough free cash flow to avoid raising external capital. We also find that for small firms, the reaction to capital investment announcements are positively related to free cash flow when managers have high growth opportunities, but negatively related when investment opportunity is small. This result is consistent with Noe (1988), who shows that restricting managers’ investment choices to positive NPV projects is necessary to obtain the pecking order results of Myers and Majluf (1984).     

Economic shock and share repurchases

Using the most recent financial crisis as a natural experiment, we examine firm valuation, capital structure adjustment, and takeover deterrence as motives for share repurchases. We find that both overvalued firms and low levered firms are more likely to announce share repurchase programs and buy back more shares following the repurchase announcements. Potential target firms are more likely to announce larger share repurchase programs, but there is no significantly positive relation between the takeover probability and the completion rate. We also find that the decision to announce share repurchase and the decision to actually buy back shares following the repurchase announcement are separate to some extent.     

The effect of ESOP adoptions on corporate performance: are there really performance changes?

Employee Stock Ownership Programs (ESOPs) have long been promoted as a motivational tool: employees become profit‐minded owners. Latterly, however, more ESOPs are being used as part of a takeover defense: here the ESOPs main purpose is to put more company stock in friendly hands—the employees—who, like existing management, could suffer layoffs, etc. in a hostile takeover. We find that, as a group, only the takeover‐related ESOPs are associated with increased leverage (itself a takeover defense). Non‐target firms show no long‐term increase in debt‐to‐assets. We find little evidence to support the motivation hypothesis: while actual labor costs are lower for ESOP firms, after industry‐adjusting they tend to be unaffected or higher. We find that a few measures of firm financial performance [return‐on‐equity (ROE), return‐on‐assets (ROA), net profit margin (NPM)] do improve significantly, but this appears to be largely a short‐term effect. Industry‐adjusted holding period returns appear to be unaffected by the ESOP; however, ESOP firms that leverage show evidence of long‐term market underperformance. We conclude that ESOPs provide, at best, only a short‐term boost to corporate performance. Copyright © 2000 John Wiley & Sons, Ltd.     

Short-selling restrictions,takeovers and the wealth of long-run shareholders

In this paper we consider a situation in which a firm may be able to influence the investors’ ability to short-sell its stock. We analyze the effect short-selling restrictions have on the market price and the subsequent effect generated on the market for corporate control. More precisely, we argue that short-selling restrictions may lead to exclusion of pessimistic beliefs and may therefore inflate prices. Thus, if a company is poorly managed and has a stock with strong short-selling restrictions, a profitable takeover will not emerge because of the high stock price. The raider may not have the incentives to acquire the company as its price will be above its fundamental value, conditional on takeover, even accounting for the potential benefits of takeover. We then argue that such effects are detrimental to long-run shareholders and that a value-maximizing strategy is to have a stock with no short-selling restrictions.