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1 – 10 of over 1000The purpose of this paper is to examine the relationship between estimated default frequencies (EDFs) and a government index that proxies for takeover defense provisions for…
Abstract
Purpose
The purpose of this paper is to examine the relationship between estimated default frequencies (EDFs) and a government index that proxies for takeover defense provisions for publicly‐traded financial institutions from 2002 to 2004.
Design/methodology/approach
Using a sample of publicly‐traded financial institutions, the effect of anti‐takeover provisions on EDFs was analyzed.
Findings
It was found that financial institutions with multiple takeover defenses tend to have lower EDFs compared with those with fewer takeover defenses. This result is robust to a variety of specifications and is supportive of the wealth distribution hypothesis. Further, it appears that the result is primarily driven by non‐depository institutions. This may imply that regulation of depository institutions mitigates takeover defense effects on managerial behavior.
Originality/value
This paper adds to the corporate finance literature, which reports mixed findings on the relationships between takeover defenses and firm value.
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A corporate takeover (with major stake in equity) gives the acquirer the right to appoint majority of directors in the target’s board to control its management and policy…
Abstract
A corporate takeover (with major stake in equity) gives the acquirer the right to appoint majority of directors in the target’s board to control its management and policy decisions. When such acquisition is unsolicited and unwelcome, it becomes a “hostile takeover.” In such cases, the acquirer is said to be a “raider” and the raider’s management team may act under the influence of “hubris” implying that they seek to acquire the target for their own personal motives ignoring pure economic gains for the owners of both the companies. The hostile bidder makes all possible efforts to justify the takeover by paying handsome premium over the target’s fairly valued share price. In a hostile takeover, the target management or target promoters resist and fight tooth and nail against the raider to convey to the world that the bidder’s acts are not in the best interest of all their stakeholders. Any unsolicited and hostile takeover offer is generally viewed as oppression, domination or coercion by the bidding company against the target and its management. In a hostile bid, the existing target management always believes that whatever they do is in best interest of everyone. They feel complacent and assume that their standards of corporate governance are of highest order. Therefore, they are unwilling to succumb to the aggression and hostility of another corporate entity for takeover. The “so-called” victimized target resorts to all means to gain sympathy from peers, press, common shareholders, employees and general public. In today’s regulated market for corporate control, an intelligent hostile bidder would probably not acquire a business unless it has good strategic or financial reasons to do so. Hence, “stewardship” on the part of bidder’s management is very important in case of any hostile takeover. This chapter derives motivation from a three-and-half-decade-old abortive hostile takeover bid in India by Caparo Group of the UK and also the recently completed hostile takeover in India of a famous mid-sized information technology company, Mindtree by Larsen & Toubro, a major conglomerate. This research aims at developing a distinctive model to demonstrate that unsolicited hostile takeover may not be a good mechanism for a successful business combination.
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Poison pill adoption is often considered as the most effective tactic to fend off an unsolicited takeover bid. However, it is difficult to identify the deterrent effect because…
Abstract
Purpose
Poison pill adoption is often considered as the most effective tactic to fend off an unsolicited takeover bid. However, it is difficult to identify the deterrent effect because the adoption is naturally endogenous. The purpose of this paper is to use plausibly exogenous instruments to mitigate the endogeneity problem.
Design/methodology/approach
The author employs two econometric models: the linear probability model and the bivariate probit model to examine the effect of poison pills on the outcome of a takeover.
Findings
Using a sample of 655 unsolicited takeovers, the author finds that poison pills substantially reduce the likelihood that a takeover bid, once undesirably placed, is completed. This negative impact strongly supports the manager entrenchment hypothesis in that managers adopt poison pills to ensure the continuation of their private benefits. However, the author finds no strong evidence consistent with the shareholder interest hypothesis that poison pills enhance the management’s ability to negotiate higher premiums or reject inadequate offers.
Research limitations/implications
The demise of the market for unsolicited takeovers with the disappearance of poison pills can be explained by the fact that poison pills, if adopted, will have an absolute deterrent effect on the takeover likelihood of success, and targets always have the power to adopt them instantly.
Practical implications
There should be policies to limit the power of managers to adopt poison pills because it causes the entrenchment problem which will negatively affect the firm value.
Originality/value
The author tackles the problem of the endogeneity of poison pill adoptions. The author shows that poison pills have a strong negative effect on the takeover outcome and the result can explain the decreasing number of unsolicited takeovers.
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Jocelyn D. Evans, Mark K. Pyles and Hyuntai Choo
The purpose of this paper is to analyze the role of large equity ownership by both institutions and outside block shareholders in monitoring the board of directors’ decision to…
Abstract
Purpose
The purpose of this paper is to analyze the role of large equity ownership by both institutions and outside block shareholders in monitoring the board of directors’ decision to initially adopt defense mechanisms and the subsequent capital market reaction to the adoption.
Design/methodology/approach
This paper employs an empirical methodology that controls for selection bias. Multiple regressions were employed to assess the relationship among the variables.
Findings
Stockholder wealth effects of poison pills are positively related to pressure‐resistant institutions, which is consistent with effective monitoring. The wealth effects of poison pills, however, are negatively related to pressure‐sensitive investors, consistent with passivity. No empirical relation was found between ownership structure and shareholder approved amendments such as classified boards and fair price amendments.
Research limitations/implications
This study was conducted as a large sample analysis over an earlier time period that was more applicable for evaluating anti‐takeover techniques.
Practical implications
The results are consistent with pressure‐resistant institutions actively monitoring to prevent unilaterally implemented defense mechanisms of all types, whereas pressure‐sensitive institutions appear to more readily accept poison pills.
Originality/value
These results suggest that failing to control for the type of outside investor may not clearly portray documented relations in other corporate governance studies.
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Hoje Jo and Carrie Pan
The purpose of this paper is to examine the relation between managerial entrenchment and dividend policy for a large number of US industrial firms and examine the relative…
Abstract
Purpose
The purpose of this paper is to examine the relation between managerial entrenchment and dividend policy for a large number of US industrial firms and examine the relative importance of three competing explanations behind the empirical association between managerial entrenchment and dividend policy, namely, the entrenchment irrelevance hypothesis, the dividend signaling hypothesis, and the optimal entrenchment hypothesis.
Design/methodology/approach
Utilizing all firms in the Investor Responsibility Research Center database, Compustat and center for research in security prices (CRSP), this paper investigates firm's propensity to pay dividends based on various logit and Tobit regressions as a function of managerial entrenchment measured by Gompers et al. G index after controlling for known determinants of firms' dividend decisions during the period from 1990 to 2003.
Findings
Results show that firms with entrenched managers are more likely to pay dividends. Their high propensity to pay persists over time. A large cash reserve can be used to deter hostile takeovers. Paying dividends reduces cash holdings, leaving the firm more vulnerable to hostile takeovers. In equilibrium, value‐maximizing firms with weak investment opportunities provide managers against takeovers to induce them to distribute cash rather than build a warchest against unwanted takeovers.
Originality/value
The main finding confirms the belief that firms choose a combination of anti‐takeover provisions and dividend policy to maximize shareholder value, evidence in favor of the optimal entrenchment hypothesis.
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Phillip T. Lamoreaux, Lubomir P. Litov and Landon M. Mauler
We document the emergence of the Lead Independent Director (LID) board role in a sample of U.S. firms from 1999–2015. We find that firms that adopt an LID board role are larger…
Abstract
We document the emergence of the Lead Independent Director (LID) board role in a sample of U.S. firms from 1999–2015. We find that firms that adopt an LID board role are larger and have more independent boards, higher institutional investor holdings, and an NYSE listing. Firms with greater anticipated benefits from monitoring also adopt an LID role, e.g., firms with dual CEO-Chairman, with more takeover defense mechanisms, and with higher cash holdings. Using an event study methodology, we find that investors respond positively to the adoption of an LID board role. Lastly, using instrumental variables to address endogeneity in the LID board role, we find that firms with an LID are more likely to terminate poorly performing CEOs. Taken as a whole, these results suggest that the LID board role enhances firm value and improves the quality of corporate governance.
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The purpose of this study is to examine the impact of the transposition of the EU directive that regulates M&As on cross-border deals. Acquirers of targets located in the European…
Abstract
Purpose
The purpose of this study is to examine the impact of the transposition of the EU directive that regulates M&As on cross-border deals. Acquirers of targets located in the European Union (EU) must comply not only with takeover rules set individually by member states but also with European Council Directives. The most significant of these Directives in the context of mergers and acquisitions (M&As) is the Takeover Bids Directive (TBD). The intent of the Directive is to ensure equal treatment for all companies launching takeover bids or that are subject to a change in control, providing minimum harmonization rules in view of creating a transparent environment for cross-border takeovers.
Design/methodology/approach
This study uses the event-study and difference-in-differences approaches.
Findings
Using a sample of 2,129 M&As conducted between 2000 and 2015, this paper finds positive acquisition synergy for acquirers targeting firms from countries with stronger investor protection rules compared to the average of the EU, but no evidence regarding cross-border deals. The results support the prediction that regulation makes countries diverge more depending on their ex ante level of investor protection.
Originality/value
This study examines the impact of the enactment of the TBD on announcement returns of M&As in the EU.
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Viput Ongsakul, Pattanaporn Chatjuthamard, Napatsorn Jiraporn and Pornsit Jiraporn
This study aims to investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend…
Abstract
Purpose
This study aims to investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend to be risk-averse as they are more exposed to idiosyncratic risk, resulting in sub-optimal risk-taking that does not maximize shareholders’ wealth. The takeover market alleviates this problem, inducing managers to take more risk. Therefore, risk-taking incentives inside the firm are less powerful when the outside takeover market is more active.
Design/methodology/approach
Exploiting a novel measure of takeover vulnerability recently constructed by Cain et al. (2017), the authors explore how takeover vulnerability influences executive risk-taking incentives. Using a large sample of US firms, the authors use fixed-effects regressions, propensity score matching and instrumental variable analysis.
Findings
Consistent with this study’s hypothesis, a more active takeover market results in less powerful risk-taking incentives. Specifically, a rise in takeover vulnerability by one standard deviation diminishes executive risk-taking incentives by 22.39%, which is an economically meaningful magnitude.
Originality/value
To the best of the authors’ knowledge, this study is the first to explore the effect of the takeover market on managerial risk-taking incentives, using a novel measure of takeover susceptibility. The authors’ measure of takeover vulnerability is considerably less susceptible to endogeneity, enabling the authors to draw causal inferences with more confidence.
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Pattanaporn Chatjuthamard, Pornsit Jiraporn, Sang Mook Lee, Ali Uyar and Merve Kilic
Theory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this…
Abstract
Purpose
Theory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, this paper aims to investigate the effect of the takeover market on board characteristics with special emphasis on board gender diversity.
Design/methodology/approach
This paper exploits a novel measure of takeover vulnerability based on state legislation. This novel measure is likely exogenous as the legislation was imposed from outside the firm. By using an exogenous measure, the analysis is less vulnerable to endogeneity and is thus more likely to show a causal effect.
Findings
The results show that a more active takeover market leads to lower board gender diversity. Specifically, a rise in takeover vulnerability by one standard deviation results in a decline in board gender diversity by 10.01%. Moreover, stronger takeover market susceptibility also brings about larger board size and less board independence, corroborating the substitution effect. Additional analysis confirms the results, including propensity score matching, generalized method of moments dynamic panel data analysis and instrumental variable analysis.
Originality/value
The study is the first to explore the effect of the takeover market on board gender diversity. Unlike most of the previous research in this area, which suffers from endogeneity, this paper uses a novel measure of takeover vulnerability that is probably exogenous. The results are thus much more likely to demonstrate causality.
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The purpose of this paper is to examine whether the gender of the top executives is associated with the strength of corporate governance mechanisms within a firm.
Abstract
Purpose
The purpose of this paper is to examine whether the gender of the top executives is associated with the strength of corporate governance mechanisms within a firm.
Design/methodology/approach
The paper uses panel and instrumental variable regressions on an eight-year sample of the S&P 1,500 firms.
Findings
The results indicate that firms with female Chief Executive Officers (CEOs) and Chief Financial Officers have higher quality governance practices. Moreover, female CEOs are documented to have the most significant influence on the governance attributes related to the board of directors and takeover defenses mechanisms.
Originality/value
Overall, these findings indicate that the gender of the firm’s executives may have important implications for the strength of corporate governance. The paper promotes the importance of the recent national policies in numerous countries on gender quotas at the executive level.
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