Does Takeover Protection Matter? Evidence from a Natural Experiment

53 Pages Posted: 16 Mar 2016 Last revised: 15 May 2018

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Adam S. Yore

University of Missouri at Columbia - Department of Finance

Date Written: April 2, 2018

Abstract

Internal slack is a primary contributor to agency problems. As such, shareholders’ updated valuation of internal slack reveals their revised assessment of potential agency conflicts. We study how the value of internal cash changes following state antitakeover regulation events. After carefully addressing the critiques of such experiments, we find that the value of cash actually increases, on average, following antitakeover law implementation, but there is considerable heterogeneity in how the value changes. Firms more susceptible to quiet-life agency problems show no increases in the market-assessed value of internal slack. Conversely, cash appreciates in companies where takeover protection helps bond important commitments with major counterparties. These findings hold across different measures of antitakeover protection events..

Keywords: Cash value; Business combination laws; Takeover defenses; Natural experiments

JEL Classification: G30; G32; G34; K22; L14

Suggested Citation

Fich, Eliezer M. and Harford, Jarrad and Yore, Adam S., Does Takeover Protection Matter? Evidence from a Natural Experiment (April 2, 2018). Available at SSRN: https://ssrn.com/abstract=2748086 or http://dx.doi.org/10.2139/ssrn.2748086

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Jarrad Harford (Contact Author)

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Adam S. Yore

University of Missouri at Columbia - Department of Finance ( email )

403 Cornell Hall
Columbia, MO 65211
United States
573-884-1446 (Phone)

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