Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting

Abstract:     
I examine how strong corporate governance proxied by the threat of hostile takeovers affects innovation. Using a panel of 10,110 US firms over the 1976-2000 period, patents and patent citations to measure the quantity and quality of innovation, and the enactment of state antitakeover laws as an exogenous decrease in the threat of hostile takeovers, I find that antitakeover laws stifle innovation. Most of the impact of antitakeover laws on innovation occurs two or more years after they are enacted, indicating a causal effect. The negative effect of antitakeover laws is mitigated but not completely eliminated by the presence of alternative governance mechanisms such as large shareholders, pension fund ownership, insider ownership, and financial leverage. The results are robust to using different sub-samples, sub-periods and time lags, different types of antitakeover laws, and R\&D expenditures to measure the input, rather than the output of innovation.

Keywords: Corporate Governance, Takeovers, Innovation, Financial Constraints, Managerial Myopia

JEL Classifications: G31, G32, G34, G38

Working Paper Series