Universal Demand Laws Did Not Increase Management Entrenchment

Abstract

An emerging line of research based on Appel (2019) finds that firms incorporated in Universal Demand (UD) law adopting states experience an increase in the use of entrenchment provisions. Our granular investigation shows that the empirical link between UD laws and management entrenchment is not supported by the evidence. We instead find that the results in Appel (2019) are driven by a small number of firms adopting poison pill and golden parachute provisions after substantial long-term drops in market value. Using hand-collected data, we additionally find that the vast majority of changes in the use entrenchment provisions among affected firms were in fact announced before the enactment of UD laws. The evidence calls into question the existence of a cause-and-effect link between UD laws and management entrenchment.

Keywords: Universal Demand Laws, Corporate Governance, E-Index, ISS Database

JEL Classification: G34, G38, K22, K41