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Management Quality and Antitakeover Provisions

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  • Thomas J. Chemmanur
  • Imants Paeglis
  • Karen Simonyan

Abstract

We present the first empirical analysis of the relationship between a firm’s management quality and the prevalence of antitakeover provisions in its corporate charter and their influence on initial public offering (IPO) valuation and post-IPO performance. We test the implications of the managerial entrenchment hypothesis, which implies that antitakeover provisions serve only to enhance the control benefits of incumbent management, and the long-term value creation hypothesis, which implies that such provisions can enhance value in the hands of higher quality management. We find that, first, firms with higher quality management and greater growth options are associated with a greater number of antitakeover provisions. Second, firms with higher management quality and a greater number of antitakeover provisions outperform other firms in the sample in terms of post-IPO operating and stock return performance and obtain higher IPO valuations. Our findings reject the managerial entrenchment hypothesis and support the long-term value creation hypothesis.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/655805
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File URL: http://www.jstor.org/stable/full/10.1086/655805
Download Restriction: Access to the online full text or PDF requires a subscription.

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 54 (2011)
Issue (Month): 3 ()
Pages: 651 - 692

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Handle: RePEc:ucp:jlawec:doi:10.1086/655805

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Gao, Wenlian & Ng, Lilian & Wang, Qinghai, 2008. "Does geographic dispersion affect firm valuation?," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 674-687, December.
  2. Chemmanur, Thomas J. & Jiao, Yawen, 2012. "Dual class IPOs: A theoretical analysis," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 305-319.

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