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

52 Pages Posted: 2 Nov 2014 Last revised: 13 Jul 2016

Matthew D. Cain

U.S. Securities and Exchange Commission

Stephen B. McKeon

University of Oregon - Department of Finance

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Date Written: July 12, 2016

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

Suggested Citation

Cain, Matthew D. and McKeon, Stephen B. and Davidoff Solomon, Steven, Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers (July 12, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2517513 or http://dx.doi.org/10.2139/ssrn.2517513

Matthew D. Cain (Contact Author)

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States

Stephen B. McKeon

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Steven Davidoff Solomon

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

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