Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-12-03T19:13:19.455Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Classified Boards Deter Takeovers? Evidence from Merger Waves

Published online by Cambridge University Press:  27 March 2023

Kose John ,
Dalida Kadyrzhanova  and
Sangho Lee
Kose John
Affiliation:
New York University Stern School of Business [email protected]
Dalida Kadyrzhanova*
Affiliation:
Federal Reserve Board
Sangho Lee
Affiliation:
California State Polytechnic University, Pomona College of Business Administration [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We exploit the arrival of industry-wide synergistic merger waves to identify whether classified boards deter takeover bids. In a stylized model, we show that when target classified boards are costly to bidders, their negative effect on takeover likelihood should be more pronounced during merger waves. Using a sample of takeover bids in the United States between 1990 and 2016, we find strong evidence supporting this prediction. The results are robust to accounting for the benefits of classified boards and controlling for other antitakeover provisions. Our findings suggest that classified boards effectively reduce a firm’s exposure to the takeover market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 759 - 795
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee and Mara Faccio (the editor) for helpful suggestions. We also thank Anup Agarwal, Yakov Amihud, Jennifer Arlen, Thomas Bates, Lucian Bebchuk, Espen Eckbo, Alicia Davis Evans, Antonio Falato, Michael Fishman, Mariassunta Giannetti, Victoria Ivashina, Ehud Kamar, Pete Kyle, Mike Lemmon, Xuelin Li, Kate Litvak, Vojislav Maksimovic, Rich Mathews, Holger Mueller, Gordon Phillips, Nagpurnanand Prabhala, Avri Ravid, David Robinson, Kelly Shue, David Yermack, and participants at the 2015 All-Georgia Finance Conference, 2014 Ackerman Conference on Corporate Governance, 2017 Finance Down Under Conference, 2016 Financial Intermediation Research Society meeting, 2020 Financial Management Association meeting, 2020 NYU Corporate Governance Luncheon, Clemson University, Exeter University, and University of Bristol for their helpful comments and suggestions. An earlier version of this article circulated under the title “Managerial Entrenchment Waves.” The opinions expressed herein are those of the authors and do not represent those of the Federal Reserve Board or the Federal Reserve System. All remaining errors are ours.

References

Ai, C., and Norton, E. C.. “Interaction Terms in Logit and Probit Models.” Economics Letters, 80 (2003), 123–129.CrossRefGoogle Scholar
Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103–120.CrossRefGoogle Scholar
Bates, T. W.; Becher, D. A.; and Lemmon, M. L.. “Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control.” Journal of Financial Economics, 87 (2008), 656–677.CrossRefGoogle Scholar
Bebchuk, L.; Coates, J.; and Subramanian, G.. “The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy.” Stanford Law Review, 54 (2002), 887–951.CrossRefGoogle Scholar
Bebchuk, L., and Cohen, A.. “The Costs of Entrenched Boards.” Journal of Financial Economics, 78 (2005), 409–433.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Betton, S.; Eckbo, B. E.; and Thorburn, K. S.. “Chapter 15: Corporate Takeovers.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 2, Eckbo, B. E., eds. North-Holland: Elsevier (2008), 291–430.CrossRefGoogle Scholar
Bhagat, S., and Romano, R.. “Event Studies and the Law: Part II: Empirical Studies of Corporate Law.” American Law and Economics Review, 4 (2002), 380–423.CrossRefGoogle Scholar
Bradley, M.; Desai, A.; and Kim, E. H.. “Synergistic Gains from Corporate Acquisitions and their Division between the Stockholders of Target and Acquiring Firms.” Journal of Financial Economics, 21 (1988), 3–40.CrossRefGoogle Scholar
Catan, E. M., and Kahan, M.. “The Law and Finance of Antitakeover Statutes.” Stanford Law Review, 68 (2016), 629.Google Scholar
Chamberlain, G. “Analysis of Covariance with Qualitative Data.” Review of Economic Studies, 47 (1980), 225–238.CrossRefGoogle Scholar
Cohen, A., and Wang, C. C. Y.. “How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment.” Journal of Financial Economics, 110 (2013), 627–641.CrossRefGoogle Scholar
Comment, R., and Schwert, G. W.. “Poison or Placebo? Evidence on the Deterrence and Wealth Effects of Modern Antitakeover Measures.” Journal of Financial Economics, 39 (1995), 3–43.CrossRefGoogle Scholar
Core, J. E.; Guay, W. R.; and Rusticus, T. O.. “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations.” Journal of Finance, 61 (2006), 655–687.CrossRefGoogle Scholar
Cremers, M., and Ferrell, A.. “Thirty Years of Shareholder Rights and Firm Value.” Journal of Finance, 69 (2014), 1167–1196.CrossRefGoogle Scholar
Cremers, M.; Litov, L. P.; and Sepe, S. M.. “Staggered Boards and Long-Term Firm Value, Revisited.” Journal of Financial Economics, 126 (2017), 422–444.CrossRefGoogle Scholar
Daines, R., and Klausner, M.. “Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs.” Journal of Law, Economics, & Organization, 17 (2001), 83–120.CrossRefGoogle Scholar
DeAngelo, H., and Rice, E. M.. “Antitakeover Charter Amendments and Stockholder Wealth.” Journal of Financial Economics, 11 (1983), 329–359.CrossRefGoogle Scholar
Eisfeldt, A. L., and Rampini, A. A.. “Capital Reallocation and Liquidity.” Journal of Monetary Economics, 53 (2006), 369–399.CrossRefGoogle Scholar
Eisfeldt, A. L., and Shi, Y.. “Capital Reallocation.” Annual Review of Financial Economics, 10 (2018), 361–386.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Field, L.; and Lowry, M.. “Bucking the Trend: Why Do IPOs Choose Controversial Governance Structures and Why Do Investors Let Them.” Journal of Financial Economics, 146 (2022), 27–54.CrossRefGoogle Scholar
Gallagher, D. M., and Grundfest, J.. “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.” Rock Center for Corporate Governance at Stanford University Working Paper (2014).CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.CrossRefGoogle Scholar
Grossman, S., and Hart, O.. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94 (1986), 691–719.CrossRefGoogle Scholar
Harford, J. “What Drives Merger Waves?” Journal of Financial Economics, 77 (2005), 529–560.CrossRefGoogle Scholar
Hart, O., and Moore, J.. “Property Rights and the Nature of the Firm.” Journal of Political Economy, 98 (1990), 1119–1158.CrossRefGoogle Scholar
Jensen, M. C. “Takeovers: Their Causes and Consequences.” Journal of Economic Perspectives, 2 (1988), 21–48.CrossRefGoogle Scholar
Johnson, W. C.; Karpoff, J. M.; and Yi, S.. “The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms.” Journal of Financial Economics, 117 (2015), 307–332.CrossRefGoogle Scholar
Johnson, W. C.; Karpoff, J. M.; and Yi, S.. “The Life Cycle Effects of Corporate Takeover Defenses.” Review of Financial Studies, 35 (2022), 2879–2927.CrossRefGoogle Scholar
Jovanovic, B., and Rousseau, P. L.. “The Q-Theory of Mergers.” American Economic Review, 92 (2002), 198–204.CrossRefGoogle Scholar
Kadyrzhanova, D., and Rhodes-Kropf, M.. “Concentrating on Governance.” Journal of Finance, 66 (2011), 1649–1685.CrossRefGoogle Scholar
Karpoff, J. M.; Schonlau, R. J.; and Wehrly, E. W.. “Do Takeover Defense Indices Measure Takeover Deterrence?” Review of Financial Studies, 30 (2017), 2359–2412.CrossRefGoogle Scholar
Karpoff, J. M.; Schonlau, R. J.; and Wehrly, E. W.. “Which Antitakeover Provisions Deter Takeovers?” Journal of Corporate Finance, 75 (2022), 102218.CrossRefGoogle Scholar
Karpoff, J. M., and Wittry, M. D.. “Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws.” Journal of Finance, 73 (2018), 657–714.CrossRefGoogle Scholar
Klausner, M. “Fact and Fiction in Corporate Law and Governance.” Stanford Law Review, 65 (2013), 1325–1370.Google Scholar
Maksimovic, V.; Phillips, G.; and Yang, L. I. U.. “Private and Public Merger Waves.” Journal of Finance, 68 (2013), 2177–2217.CrossRefGoogle Scholar
Manne, H. G. “Mergers and the Market for Corporate Control.” Journal of Political Economy, 73 (1965), 110–120.CrossRefGoogle Scholar
Mikkelson, W. H., and Partch, M. M.. “Managers’ Voting Rights and Corporate Control.” Journal of Financial Economics, 25 (1989), 263–290.CrossRefGoogle Scholar
Mitchell, M., and Mulherin, H.. “The Impact of Industry Shocks on Takeover and Restructuring Activity.” Journal of Financial Economics, 41 (1996), 193–229.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293–315.CrossRefGoogle Scholar
Rhodes-Kropf, M.; Robinson, D. T.; and Viswanathan, S.. “Valuation Waves and Merger Activity: The Empirical Evidence.” Journal of Financial Economics, 77 (2005), 561–603.CrossRefGoogle Scholar
Romano, R. “The Political Economy of Takeover Statutes.” Virginia Law Review, 73 (1987), 111–199.CrossRefGoogle Scholar
Rosenbaum, P. R., and Rubin, D. B.. “The Central Role of the Propensity Score in Observational Studies for Causal Effects.” Biometrika, 70 (1983), 41–55.CrossRefGoogle Scholar
Schwert, G. W. “Hostility in Takeovers: In the Eyes of the Beholder?” Journal of Finance, 55 (2000), 2599–2640.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–311.CrossRefGoogle Scholar
Song, M. H., and Walkling, R. A.. “Abnormal Returns to Rivals of Acquisition Targets: A Test of the ‘Acquisition Probability Hypothesis’.” Journal of Financial Economics, 55 (2000), 143–171.CrossRefGoogle Scholar
Stulz, R. M. “Managerial Control of Voting Rights: Financing Policies and the Market for Corporate Control.” Journal of Financial Economics, 20 (1988), 25–54.CrossRefGoogle Scholar
Supplementary material: File

John et al. supplementary material

John et al. supplementary material
Download John et al. supplementary material(File)
File 559 KB