How Does Private Firm Innovation Affect Anti-Takeover Provisions in Corporate Charters? Evidence from Firms Going Public
59 Pages Posted: 3 Dec 2018
Date Written: November 20, 2018
We make use of data on anti-takeover provisions (ATPs) and top management characteristics hand-collected from IPO prospectuses to analyze the effect of the pre-IPO innovativeness and the top management quality of private firms on the number and strength of ATPs in their corporate charters (formed at IPO). We test two opposing hypotheses: the “long-term value creation” hypothesis, which predicts that more innovative private firms and those with higher top management quality will include a larger number of (and stronger) ATPs in their corporate charters; and the “management entrenchment” hypothesis, which makes the opposite prediction. Our empirical findings are as follows. First, firms with greater pre-IPO innovativeness (as measured by the number of patents and citations per patent) and higher top management quality are each associated with a larger number of and stronger ATPs; the joint effect of pre-IPO innovativeness and top management quality on the number and strength of ATPs is also positive. Second, firms with stronger ATPs at IPO have significantly greater post-IPO innovation productivity, measured by the quantity and quality of innovation, as well as by the economic and scientific significance of the patents produced. The joint effect of strong ATPs and higher top management quality on post-IPO innovation is also positive. Finally, the IPO market rewards firms with a combination of greater pre-IPO innovation productivity and stronger ATPs with higher IPO and immediate post-IPO secondary market valuations. Overall, our findings support the long-term value creation hypothesis and reject the management entrenchment hypothesis.
Keywords: Anti-Takeover Provisions (ATPs), Private Firms, Pre-IPO Innovation, Top Management Quality, Initial Public Offerings (IPOs)
JEL Classification: G30, G34, O32
Suggested Citation: Suggested Citation