Takeover Defenses, Innovation, and Value-Creation : Evidence from Acquisition Decisions

The desirability of anti-takeover provisions (ATPs) is a contentious issue. ATPs might enable managerial empire building by insulating managers from disciplinary takeovers. However, some companies, such as ‘hard-to-value' (HTV) companies, might trade at a discount due to valuation difficulties, thereby exposing HTV companies to opportunistic takeovers, and creating agency conflicts of managerial risk-aversion. ATPs might ameliorate such managerial risk aversion by inhibiting opportunistic takeovers. This paper analyzes acquisitions made by HTV firms, focusing on whether the acquirer (not the target) is entrenched in order to examine the impact of entrenchment managerial decision-making. The results show that HTV firms that are entrenched make acquisitions that generate more shareholder wealth and are more likely to increase corporate innovation, suggesting that ATPs can be beneficial in some firms