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Takeover Defenses, Firm-Specific Skills and Managerial Entrenchment

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  • Filippo Ippolito

Abstract

We examine the shareholder wealth effects of takeover defenses by developing a model in which takeovers facilitate the implementation of technological innovations. In the rational expectations equilibrium of the model with explicit contracts, we show that takeover defenses are deployed to insure employees' firm-specific skills and that defenses dominate severance payments as an insurance mechanism because the latter distort the incentives of employees to exert effort. However, takeover defenses also result in managerial entrenchment. Managers of firms with weak boards choose takeover defenses which maximize their benefits of control, rather than shareholder wealth: golden parachutes serve to align managerial and shareholder preferences.

Suggested Citation

  • Filippo Ippolito, 2005. "Takeover Defenses, Firm-Specific Skills and Managerial Entrenchment," OFRC Working Papers Series 2005fe13, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2005fe13
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2005fe13.pdf
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    Cited by:

    1. Mike Burkart & Samuel Lee, 2008. "One Share - One Vote: the Theory," Review of Finance, European Finance Association, vol. 12(1), pages 1-49.

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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