The bonding hypothesis of takeover defenses: Evidence from IPO firms

We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm׳s commitments by reducing the likelihood that an outside takeover will change the firm׳s operating strategy and impo...

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Bibliographic Details
Published in:Journal of financial economics 2015-08, Vol.117 (2), p.307-332
Main Authors: Johnson, William C., Karpoff, Jonathan M., Yi, Sangho
Format: Article
Language:English
Subjects:
Acquisitions & mergers
Antitakeover provisions
Bonding
Business valuation
Commitments
Hypotheses
Hypothesis
Initial public offering
Initial public offerings
IPO
Probability theory
Spillovers
Studies
Takeover defenses
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Summary:We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm׳s commitments by reducing the likelihood that an outside takeover will change the firm׳s operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm׳s use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses creates positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2015.03.008