Management Quality and Antitakeover Provisions

We present the first empirical analysis of the relationship between a firm's management quality and the prevalence of antitakeover provisions in its corporate charter and their influence on initial public offering (IPO) valuation and post-IPO performance. We test the implications of the managerial entrenchment hypothesis, which implies that antitakeover provisions serve only to enhance the control benefits of incumbent management, and the long-term value creation hypothesis, which implies that such provisions can enhance value in the hands of higher quality management. We find that, first, firms with higher quality management and greater growth options are associated with a greater number of antitakeover provisions. Second, firms with higher management quality and a greater number of antitakeover provisions outperform other firms in the sample in terms of post-IPO operating and stock return performance and obtain higher IPO valuations. Our findings reject the managerial entrenchment hypothesis and support the long-term value creation hypothesis.