The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms
William C. Johnson
Suffolk University - Sawyer School of Management
Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business
February 25, 2015
Journal of Financial Economics (JFE), Forthcoming
We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm’s commitments by reducing the likelihood that an outside takeover will change the firm’s operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm’s use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses create positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.
Number of Pages in PDF File: 64
Keywords: antitakeover provisions, governance, firm value, initial public offerings
JEL Classification: G34, K22, L23
Date posted: September 7, 2011 ; Last revised: February 26, 2015
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