The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms

64 Pages Posted: 7 Sep 2011 Last revised: 26 Feb 2015

William C. Johnson

Suffolk University - Sawyer School of Management

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

Sangho Yi

Sogang University

Date Written: February 25, 2015

Abstract

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

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

William C. Johnson

Suffolk University - Sawyer School of Management ( email )

Boston, MA 02108
United States

Jonathan M. Karpoff (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

Sangho Yi

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)
82-2-705-8864 (Phone)

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