Antitakeover Statutes and Internal Corporate Governance
54 Pages Posted: 17 Sep 2015
Date Written: September 15, 2015
Abstract
Research Question/Issue: This paper examines the relation between internal corporate governance and the market for corporate control by analyzing how firms’ internal governance mechanisms are related to states’ antitakeover statutes (ATS). Specifically, we test two competing hypotheses regarding the effect of ATS on internal governance: the substitution hypothesis and the complementarity hypothesis.
Research Findings/Insights: We provide evidence that is consistent with the complementarity hypothesis that exposure to a possible takeover increases, not decreases, the need for better internal governance mechanisms. Specifically, firms that are exposed to takeover threats (i.e., firms in states without ATS or firms that opt out of states’ ATS) have stronger internal governance mechanisms (i.e., adopt a larger number of governance standards) than firms that are not exposed to takeover threats (i.e., firms in states with ATS). In a similar vein, firms adopt more internal governance standards when states abolish existing ATS.
Theoretical/Academic Implications: Our study contributes to the corporate governance literature by repudiating the notion that the market for corporate control reduces the need for internal governance mechanisms. While prior research suggests that exposure to takeover threats reduces managerial entrenchment through its disciplinary effect, our study provides evidence that exposure to a possible takeover could exacerbate the managerial myopia problem and firms mitigate this problem through internal governance mechanisms. Our study provides additional support for the importance of viewing corporate governance mechanisms in bundles.
Practitioner/Policy Implications: Our study provides empirical evidence regarding the complex ramification of states’ antitakeover statutes for corporate governance that policy makers and market regulators should consider in their decision-making.
Keywords: Corporate Governance; Antitakeover Statutes; Internal Monitoring
JEL Classification: G30, G34
Suggested Citation: Suggested Citation