Large Shareholders and the Value of Takeover Defenses

30 Pages Posted: 1 Sep 2008 Last revised: 12 May 2014

See all articles by Eitan Goldman

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance

Merih Sevilir

Indiana University - Kelley School of Business - Department of Finance

Date Written: August 28, 2008

Abstract

Takeover defenses are generally viewed as a tool used by entrenched managers to prevent raiders from taking over the firm. As a consequence, activist groups interested in governance reform have recently been arguing for the elimination of such defenses. In this paper we analyze the value impact of takeover defenses when looking at the takeover market as one component of the overall governance system of the firm. We demonstrate that governance reform that attempts to eliminate takeover defenses is not necessarily optimal for shareholders. The key insight of the model is that a company may be monitored by two distinct entities: an "active" outside raider and a large (institutional) shareholder. The paper finds that an ex-ante commitment to a more aggressive takeover defense strategy will result in both a decrease in the incentive of potential raiders to search for a value-increasing takeover as well as an increase in the incentive of the large institutional shareholder to monitor current management. Thus, the model offers a motivation as to why takeover defenses may increase the ex-ante value of the firm. An analysis of the resulting equilibrium generates several empirical predictions with respect to the conditions under which this is the case.

Keywords: Takeover defenses, large shareholders, monitoring

JEL Classification: G30, G34

Suggested Citation

Goldman, Eitan and Sevilir, Merih, Large Shareholders and the Value of Takeover Defenses (August 28, 2008). Available at SSRN: https://ssrn.com/abstract=1260374 or http://dx.doi.org/10.2139/ssrn.1260374

Eitan Goldman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

Merih Sevilir

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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