Financial institution default frequencies and takeover defenses

Purpose – The purpose of this paper is to examine the relationship between estimated default frequencies (EDFs) and a government index that proxies for takeover defense provisions for publicly-traded financial institutions from 2002 to 2004. Design/methodology/approach – Using a sample of publicly-traded financial institutions, the effect of anti-takeover provisions on EDFs was analyzed. Findings – It was found that financial institutions with multiple takeover defenses tend to have lower EDFs compared with those with fewer takeover defenses. This result is robust to a variety of specifications and is supportive of the wealth distribution hypothesis. Further, it appears that the result is primarily driven by non-depository institutions. This may imply that regulation of depository institutions mitigates takeover defense effects on managerial behavior. Originality/value – This paper adds to the corporate finance literature, which reports mixed findings on the relationships between takeover defenses and firm value.