Anti-Takeover Provisions and Investment Timing

28 Pages Posted: 11 Mar 2019 Last revised: 11 Oct 2019

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Cameron Hobbs

Victoria University of Wellington - School of Economics & Finance

Date Written: October 11, 2019

Abstract

We show how directors can set the strength of a firm's anti-takeover provisions in order to influence the investment-timing decision of a future empire-building CEO. The prospect of future hostile takeover attempts, which terminate the CEO's control benefits if successful, affects the CEO's willingness to invest in low-value projects. If anti-takeover defenses are too strong then the market for corporate control imposes insufficient discipline on the CEO, who invests too soon. If they are too weak then shareholders incur too many costs due to managerial distraction and the CEO invests too late. Anti-takeover defenses need to be stronger if the target firm's shareholders receive a larger proportion of any increase in firm value caused by a change in management.

Keywords: market for corporate control, anti-takeover provisions, manager--shareholder conflict, investment incentives, managerial power hypothesis

JEL Classification: D25, G31, G34

Suggested Citation

Guthrie, Graeme and Hobbs, Cameron, Anti-Takeover Provisions and Investment Timing (October 11, 2019). Available at SSRN: https://ssrn.com/abstract=3338176 or http://dx.doi.org/10.2139/ssrn.3338176

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Cameron Hobbs

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

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