The removals of anti-takeover provisions and CEO inside debt-equity ratio changes
68 Pages Posted: 19 Sep 2019 Last revised: 3 Sep 2020
Date Written: September 2, 2020
I document evidence that 525 S&P 1500 companies that remove anti-takeover provisions (``ATPs") in period 2009-22017 raise their CEO inside debt afterwards to address the heightened agency problem of debt due to increased leverage. By using a difference-in-difference-in-difference analysis, I document significant increases in CEO inside debt-equity ratios after companies remove ATPs. Inside debt also rises significantly after ATP removals, which accounts for 70\% of increases in the overall ratios. In contrast, inside equity significantly decreases after companies remove ATPs, as these companies reduce the stocks and options awarded to their CEOs. These findings are robust to different explanatory variables, matching samples, and removals of certain ATPs. Further analysis displays that inside debt-equity ratios increase continually for the first three years after ATP removals. This trend coincides with the after-ATP-removal spike in leverage, which is caused by increased debt issuance. I also show that increasing inside debt-equity ratios, especially increasing inside debt, helps companies reduce the cost of borrowing after ATP removals.
Keywords: Debt ﬁnancing, Corporate Governance, Takeover defenses, Executive compensation, Inside debt
JEL Classification: G12, G21, G32, G34, M12
Suggested Citation: Suggested Citation