Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

Abstract

We argue and demonstrate empirically that a firm’s institutional and legal context has first-order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law’s effect on a firm’s takeover protection depends on (i) other state antitakeover laws, (ii) pre-existing firm-level takeover defenses, and (iii) the legal regime as reflected in important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies relating to nine different outcome variables change substantially when we include controls for these considerations.

Keywords: Antitakeover laws, business combination laws, takeover defenses, natural experiments, test identification

JEL Classification: G34, G38, K22, L51