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 4, 2014
We propose and test an efficiency explanation for why firms deploy takeover defenses using 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 trading partners. This bond, in turn, encourages the firm’s trading partners to invest in their business relationships with the firm. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have customers, suppliers, or strategic partners that are vulnerable to changes in the firm’s operating strategy. An IPO firm’s use of takeover defenses is positively related to the longevity of its business relationships, indicating that defenses do in fact help to bond the IPO firm’s commitments to its business partners. An IPO firm’s large customers experience changes in share values when the firm goes public that are positively related to the IPO firm’s use of takeover defenses. The IPO firm’s valuation and subsequent operating performance also are positively related to its use of takeover defenses when it has dependent customers, suppliers, or strategic partners. These results indicate that takeover defenses are one mechanism by which IPO firms can ameliorate the hold-up problem that arises when firms develop close working relationships with customers, suppliers, and strategic partners.
Number of Pages in PDF File: 61
Keywords: antitakeover provisions, governance, firm value, initial public offerings
JEL Classification: G34, K22, L23working papers series
Date posted: September 7, 2011 ; Last revised: February 20, 2014
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