Takeover defenses: Entrenchment and efficiency

This paper explores the potential role of anti-takeover provisions (ATPs) in long-term value creation. Using a change in the legal environment in Delaware as an exogenous event, we document that a subset of firms with a relatively longer term focus (innovative firms) benefit from ATPs. Particularly, these firms experience an increase in Tobin's Q following a state law change in Delaware that increases the effectiveness of ATPs in defending against hostile takeovers. This increase is greater than that for non-innovative firms in Delaware as well as for innovative firms outside Delaware. Furthermore, the innovative firms in Delaware experience a stronger positive market reaction around the state law change dates, relative to other firms. Finally, in a cross-sectional setting we find that innovative firms with above-average takeover protection outperform other firms and are less likely to engage in harmful real earnings management. Taken together, these results provide empirical evidence of potential benefits of ATPs and help explain why such protection continues to be prevalent in the United States.