The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms

We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm’s commitments by reducing the likelihood that an outside takeover will change the firm’s operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm’s use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses create positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.

Keywords: antitakeover provisions, governance, firm value, initial public offerings

JEL Classification: G34, K22, L23

Suggested Citation: Suggested Citation

Johnson, William C. and Karpoff, Jonathan M. and Yi, Sangho and Yi, Sangho, The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms (February 25, 2015). Journal of Financial Economics (JFE), 117 (2) (August 2015), pp. 307-332, Available at SSRN: https://ssrn.com/abstract=1923667 or http://dx.doi.org/10.2139/ssrn.1923667