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The Effect of Takeover Protection in Quiet Life and Bonding Firms

Published online by Cambridge University Press:  02 January 2024

Eliezer M. Fich Open the ORCID record for Eliezer M. Fich [Opens in a new window] ,
Jarrad Harford Open the ORCID record for Jarrad Harford [Opens in a new window]  and
Adam S. Yore Open the ORCID record for Adam S. Yore [Opens in a new window]
Eliezer M. Fich*
Affiliation:
Drexel University LeBow College of Business Finance Department
Jarrad Harford
Affiliation:
University of Washington Michael G. Foster School of Business Department of Finance jarrad@uw.edu
Adam S. Yore
Affiliation:
University of Missouri Trulaske College of Business Department of Finance yorea@missouri.edu
*
efich@drexel.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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Antitakeover measures are controversial because the evidence of their net effect on shareholders is mixed. We propose that, for many firms, the potential bonding benefits outweigh the agency costs of the quiet life, explaining the mixed results. We study business combination and poison pill laws as exogenous shocks to takeover vulnerability and use shareholder valuation of internal slack as an indicator of the net effect of takeover protection. Firms susceptible to quiet life agency problems exhibit a decrease in the market-assessed value of internal slack. Conversely, cash appreciates at companies where takeover protection bonds commitments with major counterparties.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 41
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We appreciate helpful comments from an anonymous referee, Mark Chen, Erik Devos (discussant), Ran Duchin, Mara Faccio (the editor), Andrey Golubov, Tom Griffin, Mark Huson, Bill Johnson, Dalida Kadyrzhanova, Jon Karpoff, Omesh Kini, Chis Parsons, Raghu Rau, Luc Renneboog, Nick Travlos, Mike Wittry, Moqi Xu (discussant), seminar participants at Georgia State University, ESTM/Humboldt University in Berlin, University of Missouri, University of Oklahoma, University of Reading, University of Surrey, University of Tilburg, and attendees at the Cass Business School Mergers and Acquisitions Conference, the Frontiers of Finance Conference in Banff, Ontario, and the Southern Finance Association meetings. We thank Randy Heron for sharing his reincorporation data with us and Tom Griffin and David Shin for data collection assistance. All errors are our responsibility.

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