Agents Protecting Agents: An Empirical Study of Takeover Defenses in Spinoffs

Abstract

When a firm spins off a subsidiary, the parent managers create a governance structure for the spinoff and decide whether spinoff management will be protected by takeover defenses. We find evidence that agency costs at the parent firm level affect the adoption of takeover defenses for the spinoff. Takeover defenses are most common when parent managers have weak incentives to maximize firm value, and more common when parent managers would personally benefit by entrenching spinoff managers. Takeover defenses in spinoffs are also more common than in similar IPOs, where governance decisions are made by parties with substantial ownership stakes in the firm. We also find that many spinoff charters commonly contain takeover defenses that are prohibited at the parent firm, thus effectively undercutting parent shareholders' rights. Finally, we find that this entrenchment reduces share value in the parent.

Keywords: Corporate Governance, spinoff, takeover defenses, takeovers

JEL Classification: G30, G34