Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

Abstract

We argue and demonstrate empirically that a firm's institutional and legal context has first‐order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm‐level takeover defenses, and (iii) the legal regime as reflected by important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies related to nine different outcome variables change substantially when we include controls for these considerations.

Competing for government procurement contracts: The role of corporate social responsibility

“…A total of 35 states in the U.S. have adopted constituency statutes (see Karpoff & Wittry, 2017); five of them adopted the statutes during the sample period . 19 Because the enactment of the statutes does not reflect any firm's strategic decision, such "treatments" offer plausibly exogenous variation in a firm's orientation toward stakeholders.…”

International Mergers and Acquisitions Laws, the Market for Corporate Control, and Accounting Conservatism

“…Third, while the state business combination laws, the focus of many U.S. studies, were a single class of various state-level takeover statutes, the international M&A laws in our paper contain a broad spectrum of takeover provisions including, among others, the squeeze-out rules mandated by the Takeover Act in Austria and the board neutrality rule provisioned in the Takeover Panel Act in Ireland. This distinction is important, as recent studies show that the state-level business combination laws might not have had a discernible impact on takeover activity and corporate policies, casting doubt on the effectiveness of using the business combination laws alone in proxying for governance quality (Cain, McKeon, and Solomon [2017], Karpoff and Wittry [2018]). Thus, international M&A laws, encompassing a more diverse set of statutes designed to reduce frictions in M&As, allow us to gain new insights into the effect of the market for corporate control.…”

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

“…In an exhaustive analysis, Atanasov and Black (2016) document that use of shock-based designs approximately doubled from 4% to 11% of empirical governance papers between the 2001-2006 and the 2007-2011 periods. As surveyed by Karpoff and Wittry (2015), changes in state-level anti-takeover laws are often exploited as a source of quasi-exogenous variation in governance pressure. 2 As a final example, shock-based inference is common in studying real investment, which, along with leverage, is perhaps the most commonly studied dependent variable in empirical corporate finance.…”