Management Quality and Anti-Takeover Provisions

The Journal of Law and Economics 54, no. 3 (2011): 651-692

56 Pages Posted: 13 Mar 2008 Last revised: 16 Dec 2017

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Imants Paeglis

Concordia University - John Molson School of Business

Karen Simonyan

Suffolk University - Department of Finance

Date Written: January 27, 2008

Abstract

We present the first analysis in the literature of the relationship between the quality and reputation of a firm's management and the prevalence of anti-takeover provisions in the corporate charters of IPO firms, and the influence of this relationship on post-IPO performance. We test the implications of two theories regarding the above two relationships: the "managerial entrenchment" hypothesis, which implies that anti-takeover provisions are meant mainly to enhance the control benefits enjoyed by existing firm management by minimizing the probability of takeovers by rival management teams; and the "long-term value creation" hypothesis, which argues that such provisions, while they entrench firm management, can also be value enhancing in the hands of higher quality management teams. Our empirical results can be summarized as follows. First, firms with higher quality managements are associated with a greater number of anti-takeover provisions relative to those with lower quality managements. Further, within the former category, firms with larger growth options are associated with a greater number of anti-takeover provisions. Second, when we divide our sample by management quality (higher versus lower) and then by the number of anti-takeover provisions (greater versus smaller) within each management quality category, firms with higher management quality and a greater number of anti-takeover provisions outperform firms in the remaining three categories in terms of both post-IPO operating and post-IPO stock return performance. The evidence thus rejects the managerial entrenchment hypothesis and supports the long-term value creation hypothesis.

Keywords: Management Quality, Anti-Takeover Provisions, Initial Public Offerings, Operating Performance, Stock Return Performance

JEL Classification: G30, G34, G39

Suggested Citation

Chemmanur, Thomas J. and Paeglis, Imants and Simonyan, Karen, Management Quality and Anti-Takeover Provisions (January 27, 2008). The Journal of Law and Economics 54, no. 3 (2011): 651-692, Available at SSRN: https://ssrn.com/abstract=966342 or http://dx.doi.org/10.2139/ssrn.966342

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Imants Paeglis

Concordia University - John Molson School of Business ( email )

Montreal, Quebec H3G 1M8
Canada

Karen Simonyan (Contact Author)

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States
(617) 973-5385 (Phone)

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