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

40 Pages Posted: 17 Mar 2005  

Robert Daines

Stanford Law School; Stanford Graduate School of Business

Michael Klausner

Stanford Law School

Date Written: December 16, 2004

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

Suggested Citation

Daines, Robert and Klausner, Michael, Agents Protecting Agents: An Empirical Study of Takeover Defenses in Spinoffs (December 16, 2004). Stanford Law and Economics Olin Working Paper No. 299. Available at SSRN: https://ssrn.com/abstract=637001 or http://dx.doi.org/10.2139/ssrn.637001

Robert Daines

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-736-2684 (Phone)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Michael D. Klausner (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

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