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Takeover Defenses and Competition

Author

Listed:
  • Martijn Cremers
  • Vinay Nair
  • Urs Peyer

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.

Suggested Citation

  • Martijn Cremers & Vinay Nair & Urs Peyer, 2007. "Takeover Defenses and Competition," Yale School of Management Working Papers amz2491, Yale School of Management, revised 18 Sep 2007.
    • Handle: RePEc:ysm:somwrk:amz2491
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    File URL: http://icfpub.som.yale.edu/publications/2491
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    References listed on IDEAS

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    Cited by:

    1. Xavier Giroud & Holger M. Mueller, 2009. "Does Corporate Governance Matter in Competitive Industries?," NBER Working Papers 14877, National Bureau of Economic Research, Inc.
    2. Allen, Franklin & Carletti, Elena & Marquez, Robert, 2007. "Stakeholder capitalism, corporate governance and firm value," CFS Working Paper Series 2007/26, Center for Financial Studies (CFS).
    3. Sokolyk, Tatyana, 2011. "The effects of antitakeover provisions on acquisition targets," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 612-627, June.
    4. Giroud, Xavier & Mueller, Holger M, 2008. "Corporate Governance, Product Market Competition, and Equity Prices," CEPR Discussion Papers 6974, C.E.P.R. Discussion Papers.
    5. King, Tao-Hsien Dolly & Wen, Min-Ming, 2011. "Shareholder governance, bondholder governance, and managerial risk-taking," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 512-531, March.
    6. Giroud, Xavier & Mueller, Holger M., 2010. "Does corporate governance matter in competitive industries?," Journal of Financial Economics, Elsevier, vol. 95(3), pages 312-331, March.

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