The Lifecycle Effects of Firm Takeover Defenses
61 Pages Posted: 13 Jul 2016 Last revised: 17 Apr 2018
Date Written: April 2, 2018
We propose and test the value reversal hypothesis, which holds that takeover defenses that enhance value when a firm is young become costly over time. Consistent with this hypothesis, we find that (i) takeover defenses are sticky and are rarely removed, and (ii) the average relation between firm value and the use of defenses is positive at the IPO but declines and becomes negative as the firm ages. The decline in value is most pronounced among firms that deploy the most sticky defenses, for which the bonding benefits of takeover defenses decrease over time, and for which entrenchment costs increase.
Keywords: Takeover defenses, antitakeover provisions, bonding, entrenchment, lifecycle
JEL Classification: G34, K22, L14
Suggested Citation: Suggested Citation