Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers

Abstract

This study evaluates the relation between hostile takeovers and 17 takeover laws from 1965 to 2014. Using a hand-collected dataset of largely exogenous legal changes we find that certain takeover laws, such as poison pill and business combination laws, have no discernible impact on hostile activity, while others such as fair price laws have reduced hostile takeovers. We construct a Takeover Index from the laws and find that higher takeover protection is associated with lower firm value, consistent with entrenchment and agency costs. However, conditional on a bid, firms with more protection achieve higher premiums, consistent with increased bargaining power.

Keywords: hostile takeovers, corporate governance, mergers and acquisitions, laws

JEL Classification: G34, G38, K22