A Demand-Side Theory of Antitakeover Defenses

This paper develops a demand and supply framework to analyze the adoption of antitakeover defenses and constructs a demand-side theory of antitakeover provisions (ATPs). The paper views the decision to go public without ATPs as a decision to produce an unshielded target and shows that the classic literature focused on the costs of producing such a target but barely accounted for demand-side considerations. The paper argues that the more firms there are producing unshielded targets (and, therefore, the fewer firms there are adopting ATPs), the lower the price the market is willing to pay for the unshielded product. The reason for this is that not only do ATPs prevent takeovers, they also divert takeover activity to unshielded targets. The combination of existing supply-side explanations with the novel demand-side theory works to explain the findings of recent empirical studies of ATPs at firms in the initial public offering stage that have puzzled the corporate finance and corporate law literature.