The merger wave of the 1 980s, coupled with the sophistication of investment Banks' financial engineers, brought about a bewildering array of takeover defenses: "poison pills", " classified boards", "fair price amendments", and the like. Surveys have documented steep growth in various defensive amendments adopted by firms in recent years. The Investors? Responsibility Research Centre (IRRC), in surveying 424 of the Fortune 500 firms in 1986, found that 143 had adopted poison pills, 158 had fair price amendments and 223 had board of directors divided into classes. Jarrell and Poulsen's (1987) research notes the same trend in a previous survey done by the IRRC. While highlighting the relatively popularity of such amendments, they note that out of 112 Standard & Poor's 500 (S&P 500) corporations that had instituted anti-takeover amendments, only 13 of these firms had such amendments before 1982. Financial researchers have only recently provided analytical bases for many of these defensive strategies (See, for example, Harris 1990; Berkovitch and Khanna 1990; Shieifer and Vishny 1986). Much of the research has been focused on particular elements of the broad set of potential defensive maneuvers; their heterogeneity has rendered generalization quite difficult.
Studies investigating the effects of anti-takeover amendments have been, on the whole, quite inconclusive about the net effect of these financial innovations. DeAngelo and Rice (1983), while examining a sample of New York Stock Exchange (NYSE) listed firms adopting anti-takeover amend ments during 1971?, found statistically insignificant (albeit negative) abnormal stock returns around the announcement of such amendments. Conversely, Linn and McConnell's (1983) investigation into abnormal returns at the announcement date for 475 NYSE listed firms (between 1960 and 1980) found statistically significant, positive abnormal returns. Malatesta and Walking (1988) report statistically significant reductions of shareholders' wealth for firms that adopt poison pill defenses. They also note that firms adopting such defenses were significantly less profitable than the average firm in their industries during the year prior to adoption. Jarrell and Poulsen (1987), investigating similar reactions for 600 firms over the period 1979-85, detected a significant negative price reaction for certain kinds of amendments. Pugh et al. (1992), investigating the impact of the adoption of charter amendments on firms' capital expenditures and research and development outlays, conclude that managers take a longer-term view following such actions. In light of these results, it is difficult to unambiguously accept or deny the proposition that anti-takeover defenses are value maximizing for the shareholder, or that they signal managerial entrenchment.
This study focuses on the relationship between takeover defenses and the financial characteristics? of the firms that adopt these defenses. We analyze the above relationship in light of two competing hypotheses: the presence of anti-takeover amendments is consistent with shareholders initiating such amendments to maximize their wealth, versus the hypothesis that the manager is solely responsible for initiating such measures to insulate himself from the market for corporate control.
We interpret our empirical evidence to support the hypothesis that it is the interests of managers - and not those of the shareholders - that are reflected in the armory of takeover defenses adopted by the firms in our sample. Our findings indicate that it is possible to explain the adoption (and severity) of takeover defenses by a small set of firms? characteristics and that the adoption of such defenses is not consistent with shareholders? wealth-maximizing motives. As such, our results tend to agree with some of the results of Jarrell and Poulsen, Malatesta and Walking, and DeAngelo and Rice regarding the market reaction to the announcement of anti-takeover amendments.
The remainder of this chapter is organized as follows. In section 1 we provide the arguments for why anti-takeover amendments should relate to certain financial characteristics of the firm. This section is divided into three subsections containing the underlying rationale for each of our explanatory factors. Section 2 defines the various kinds of anti-takeover amendments, and describes the two data sets which are juxtaposed to provide appropriate measures of takeover defenses and firm characteristics. Section 3 presents our methodology and empirical findings: first, a set of models relating the presence of individual takeover defenses to firms? characteristics, and then a composite model in which the set of defenses adopted by the firm is considered in terms of its intensity. Section 4 contains concluding remarks.
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