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Defensive Mechanisms and Managerial Discretion

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  • Giammarino, Ronald
  • Heinkel, Robert
  • Hollifield, Burton

Abstract

The authors study a model where firms may possess free cash flow and takeovers may be disruptive. They show that the possibility of a takeover, combined with defensive mechanisms and the ability to pay greenmail, can solve the free cash flow problem in an efficient way. The payment of greenmail reveals information that generates a stock price decline that exceeds the value of the greenmail payment, even though the payment of greenmail is value maximizing. Optimal defensive measures limit takeover attempts if the target stock price is too low. The authors also provide cross-sectional implications of the analysis. Copyright 1997 by American Finance Association.

Suggested Citation

  • Giammarino, Ronald & Heinkel, Robert & Hollifield, Burton, 1997. "Defensive Mechanisms and Managerial Discretion," Journal of Finance, American Finance Association, vol. 52(4), pages 1467-1493, September.
    • Handle: RePEc:bla:jfinan:v:52:y:1997:i:4:p:1467-93
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    Citations

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    Cited by:

    1. Walter Novaes, 2002. "Managerial Turnover and Leverage under a Takeover Threat," Journal of Finance, American Finance Association, vol. 57(6), pages 2619-2650, December.
    2. Gérard Charreaux, 2000. "L'approche économico-financière de l'investissement: une vision critique," Working Papers CREGO 1000501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    3. Pearce II, John A. & Robinson, Richard Jr., 2004. "Hostile takeover defenses that maximize shareholder wealth," Business Horizons, Elsevier, vol. 47(5), pages 15-24.
    4. Chemla, Gilles, 2005. "Hold-up, stakeholders and takeover threats," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 376-397, July.
    5. repec:dau:papers:123456789/4134 is not listed on IDEAS
    6. Portolano, Alessandro, 2000. "The decision to adopt defensive tactics in Italy," International Review of Law and Economics, Elsevier, vol. 20(4), pages 425-452, December.

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