Takeover Defenses and Competition

51 Pages Posted: 4 May 2007  

Martijn Cremers

University of Notre Dame

Vinay B. Nair

University of Pennsylvania - Finance Department

Urs Peyer

INSEAD - Finance

Date Written: April 2007

Abstract

This paper studies the interaction between takeover defenses and product market competition. We find that firms in more competitive industries have more takeover defenses. This is the opposite result from what one would expect if takeover defenses always constitute an inefficient outcome that increases agency costs and managerial entrenchment. A novel explantion is provided by considering the nature of the relationship between the firm and the product (or labor) market. For firms in industries where a long-term relationship with customers and employees is vital, the disruption caused by takeovers could severely negatively impact the stakeholders. In particular, in a competitive environment, this could lead shareholders to optimally choose more takeover defenses to prevent such customers and employees from going to their closest competitor ex ante. We provide empirical evidence that stronger competition is linked to more defenses only in relationship industries, where the previously found negative relation between takeover defenses and firm performance is reversed. Our results cannot be explained by competition being a substitute for the market for corporate control. Finally, we discuss the implications of this framework for the design of various governance mechanisms. In conclusion, the paper provides a rationale for why shareholders themselves might want weak shareholder rights.

Keywords: takeovers, shareholders, governance, shareholder rights

Suggested Citation

Cremers, Martijn and Nair, Vinay B. and Peyer, Urs, Takeover Defenses and Competition (April 2007). Yale ICF Working Paper No. 07-02; 2nd Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=984064 or http://dx.doi.org/10.2139/ssrn.984064

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Vinay B. Nair

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)

Urs C. Peyer

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)

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