Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage

Abstract

We find that firms protected by "second generation" state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.

Managerial risk-taking behavior and equity-based compensation☆

“…Bertrand and Mullainathan (2003) find that plant births and deaths decrease when managers are protected from takeovers, suggesting that protected managers seek to lower firm risk. Garvey and Hanka (1999) find that leverage decreases upon passage of these antitakeover laws, while Cheng, Nagar, and Rajan (2005) find decreases in management ownership, supporting the hypothesis that managers try to reduce their exposure to firm risk. However, these papers do not directly examine changes in firm risk.…”

Corporate governance and the information environment: Evidence from state antitakeover laws

“…Table 1 lists the year in which the antitakeover laws became effective in each state (if any) and the number of unique firms in our sample that are incorporated in each state. In addition, we also note the provisions included in the antitakeover laws and state whether the laws in each state are considered "strong" or "weak" according to prior studies (e.g., Garvey and Hanka, 1999;Bertrand and Mullainathan 2003). We use this classification in sensitivity analyses discussed further below.…”

“…For example, Garvey and Hanka (1999) provide evidence that firms affected by second-generation antitakeover laws reduced their leverage, and Bertrand and Mullainathan (1999,2003) provide evidence on the effects of the laws on wages and firmlevel productivity. Cheng et al (2004) find a significant reduction in the proportion of 6 For a summary of the papers analyzing the stock price effects of antitakeover laws, see Easterbrook and Fischel (1991).…”

“…A number of studies in the law, economics, and finance literatures find that these laws have had significant economic effects. For example, prior research has documented that the antitakeover laws led to a reduction in the equity ownership of officers and directors (Cheng, Nagar, and Rajan, 2004), changes in managerial pay (Bertrand andMullainathan, 1999, 2000;Cheng and Indjejikian, 2009), a reduction in firm leverage (Garvey and Hanka, 1999), a decline in firm productivity and profitability (Bertrand and Mullainathan, 2003), and an increase in the adoption of poison pills (Comment and Schwert, 1995). More recently, Francis et al (2009) find that the state antitakeover laws led to a decrease in bond yields and an increase in bond prices, which they interpret as evidence that these laws reduced the agency cost of debt by shielding bondholders from expropriation in the event of a takeover.…”

Recent developments in German corporate governance

“…For example, Bertrand and Mullainathan (2003) and Borokhovich et al (1997) show that increased insulation from takeovers increases managerial salaries and lowers total factor productivity in US corporations. In addition, Garvey and Hanka (1999) provide evidence that anti-takeover legislation leads to fewer new investments and fewer disinvestments. All in all, it seems that the existence of an active market for corporate control is material.…”