Anti-Takeover Provisions and Corporate Disclosure
49 Pages Posted: 15 Sep 2006
Date Written: August 2007
We examine the effects of anti-takeover provisions (ATPs) on corporate disclosure by testing the following two hypotheses: (1) The market pressure hypothesis, which predicts that firms with more ATPs will provide more information to the market and have higher earnings quality because ATPs help managers pursue long-term shareholder interests and not succumb to short-term market pressures, and (2) The management entrenchment hypothesis, which predicts that firms with more ATPs will disclose less information and have lower earnings quality because ATPs help entrenched managers pursue private benefits at the expense of shareholders. We find support for the market pressure hypothesis, not the management entrenchment hypothesis. High-ATP firms are more likely to make management earnings forecasts than low-ATP firms, especially when the forecast conveys bad news and when a large fraction of the firm's institutional investors are transient investors. Low-ATP firms are also more likely than high-ATP firms to postpone their forecasts until the end of the quarter. The market reaction is stronger to negative forecasts made by low-ATP firms than to negative forecasts made by high-ATP firms. The quality of reported earnings of high-ATP firms is better than that of low-ATP firms. Evidence from analyst earnings forecasts is consistent with the above findings: analyst earnings forecasts of low-ATP firms are more optimistically biased and less accurate, especially early in the quarter, compared to those of high-ATP firms.
Keywords: Anti-takeover provisions, Management earnings forecast, Analyst earnings forecast
JEL Classification: G21, L51, O31
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