Corporate Governance and Takeover Resistance

Abstract:     
We examine the relation between internal and external corporate governance characteristics of takeover targets and the types of resistance choices selected by target managers in response to unsolicited takeover bids and the implications of those choices. Specifically we examine: 1) the propensity of target managements’ choice to use entrenchment motivated resistance tactics in contrast to those motivated by stockholder interests and corporate governance characteristics of the target firm, 2) the stockholder wealth effects of management resistance motivated by a desire to remain entrenched, and 3) the impact of entrenchment motivated resistance on the ultimate replacement of target management. Firms in our sample resorting to entrenchment orientated opposition strategies are found to have top managers with more pronounced ownership- and age-based incentives for control, and other directors with equity interests less closely aligned to stockholders, as distinct from firms using resistance tactics designed to promote stockholder wealth. Firms that follow entrenchment strategies have less independent boards, are exposed to weaker discipline from active outside blockholders and are inferior performers. Stockholder wealth is adversely affected by entrenchment motivated opposition, and managers have a greater likelihood of being disciplined as a result of resisting for entrenchment reasons. Finally, bids associated with entrenchment motivated opposition have higher initial bid premiums. The bid premium reflects the bidder’s expected valuation after gaining control and thus the size of the premium reflects the expected value creation, which in principle should be larger for disciplinary takeovers. Our tests show these results to be robust.

Number of Pages in PDF File: 54

Keywords: Takeovers, Resistance, Governance, Agency

JEL Classification: G34

working papers series