Passive Shareholders as a Takeover Defense

Abstract

This paper evaluates the effect of shareholder passiveness on the market for corporate control. We find that firms with more passive shareholders (lower ownership per non-institutional shareholder) are less likely to be takeover targets, less likely to be acquired and command higher premiums. Using the adoption of anti-takeover law in Delaware as an exogenous shock to anti-takeover protection, we show that the passiveness of shareholder base decreases as the takeover threat subsides. Our findings support the idea that a passive shareholder base is a substitute for other takeover defenses.

Keywords: Mergers and Acquisitions, Ownership Structure and Corporate Governance

JEL Classification: G34, G32