Explaining Variation in Takeover Defenses: Blame the Lawyers
Posted: 26 Mar 2002
Traditional law and economics scholarship predicts that no companies will adopt takeover defenses prior to IPOs, because defenses increase agency costs between shareholders and managers, and reduce IPO proceeds. In fact, data from 357 IPOs in the 1990s show that many companies adopt defenses prior to IPOs. Even more puzzling for conventional scholarship, defenses vary widely at the IPO stage. Analysis shows that more of this variation in defenses can be explained by characteristics of law firms advising owner-managers than by traditional theories about defenses. Among other findings: (1) Companies advised by larger law firms with more takeover experience adopt more defenses; (2) In 1991-92, companies with Silicon Valley lawyers adopted almost no defenses; by 1998, Silicon Valley lawyers' clients were as likely to use defenses as clients of other lawyers; (3) Companies with high quality underwriters and venture capital backing adopt more defenses; (4) The overall rate of defense adoption increased in the 1990s. Together, these findings provide strong evidence that lawyers determine key terms in the "corporate contract", due to agency costs between owner-managers and their lawyers.
JEL Classification: G32, G34, K22
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