Passive Shareholders as a Takeover Defense

Abstract

This paper evaluates the effect of shareholder passiveness on the market for corporate control.We find that firms with more passive shareholders (lower ownership per non-institutional shareholder) are less likely to be takeover targets, less likely to be acquired and command higher premiums. Using the adoption of anti-takeover law in Delaware as an exogenous shock to antitakeover protection, we show that the passiveness of shareholder base decreases as the takeover threat subsides. Our findings support the idea that a passive shareholder base is a substitute for other takeover defenses.JEL Codes: G34, G32

Legal Investor Protection and Takeovers

“…The authors conclude (p. 293): "We interpret the finding on tender offers as evidence of the free-rider hypothesis: that is, the bidder in a tender offer needs to pay a higher premium to induce shareholders to tender their shares." In a recent empirical study, Bodnaruk et al (2011) provide more direct evidence of the free-rider hypothesis. The authors show that: (i) takeover premia are higher when the target's share ownership is more widely dispersed, and (ii) firms with more widely dispersed share ownership are less likely to become takeover targets.…”

Legal Investor Protection and Takeovers

“…They conclude (p. 293): “We interpret the finding on tender offers as evidence of the free‐rider hypothesis: that is, the bidder in a tender offer needs to pay a higher premium to induce shareholders to tender their shares.” In a recent empirical study, Bodnaruk et al. () provide further evidence in support of the free‐rider hypothesis. In particular, they show that (i) takeover premia are higher when the target's share ownership is more widely dispersed, and (ii) firms with more widely dispersed share ownership are less likely to become takeover targets.…”