Anti-Takeover Provisions as a Source of Innovation and Value Creation

Managers are risk averse. Excessive risk-aversion can destroy shareholder wealth. A key source of risk is the threat of an opportunistic takeover designed to take advantage of depressed market prices. This is especially the case in innovative or hard-to-value ('HtV') companies whose price may be depressed due to valuation difficulties rather than managerial under-performance. For these HtV firms, the threat of an opportunistic takeover can destroy value by inducing agency conflicts of managerial risk aversion. managers and regulators argue that ATPs can ameliorate this problem. This article presents a theoretical model and empirical results that show that for HtV firms, ATPs encourage managers to make value-creating takeovers and increase innovation and do not induce agency conflicts of managerial entrenchment. This implies that for innovative or hard-to-value firms, ATPs can ameliorate managerial risk aversion and encourage value-creation.

Keywords: Takeovers, Acquisitions, Valuation, Governance, Managerial Risk Aversion, Innovation

JEL Classification: G34, O31, O32

Suggested Citation: Suggested Citation

Humphery-Jenner, Mark and Humphery-Jenner, Mark, Anti-Takeover Provisions as a Source of Innovation and Value Creation (February 1, 2011). Eastern Finance Association Annual Meeting 2011, 23rd Australasian Finance and Banking Conference 2010, Midwest Finance Association Annual Meeting 2011, 5th Annual Conference on Empirical Legal Studies, Finance and Corporate Governance Conference 2011, Financial Management Association Asia Annual Meeting 2011, Available at SSRN: https://ssrn.com/abstract=1789207 or http://dx.doi.org/10.2139/ssrn.1789207