The Law and Finance of Anti-Takeover Statutes
By permission of the Board of Trustees of the Leland Stanford Junior University, from the Stanford Law Review at 68 STAN. L. REV. [page cite or “___” (2016, Forthcoming)]
56 Pages Posted: 2 Nov 2014 Last revised: 2 Sep 2015
Date Written: October 29, 2014
Lawyers and financial economists have fundamentally different views of anti-takeover statutes. While corporate lawyers and academics generally dismiss these statutes as irrelevant, economists study them empirically and conclude that they – and hence the threat of a takeover – affect firm and managerial behavior. This article seeks to examine the divide between the law and the finance approach to anti-takeover statutes. We first explain why these statutes, as used by financial economists, are not a proper metric of the potential takeover threat facing a firm. This poses the question of why finance studies of these statutes find results. We therefore examine in greater detail three finance studies and show that their results are due to omitted variables or improper specifications. When corrected for these problems, the association between anti-takeover statutes and the hypothesized effect disappeared. We then supplement this specific critique with a more general critique that identifies three flaws – coding errors, failure to account for managerial share ownership, and selection bias – that pervade the finance studies on anti-takeover statutes and bias their results. Broadly, our paper calls into question most of the understanding of the effect of takeover threat, which is based to a large extent on finance studies of anti-takeover statutes.
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