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The effects of corporate antitakeover provisions on long-term investment: empirical evidence

Author

Listed:
  • James M. Mahoney

    (Federal Reserve Bank of New York, USA)

  • Chamu Sundaramurthy

    (University of Kentucky, USA)

  • Joseph T. Mahoney

    (University of Illinois at Urbana-Champaign, USA)

Abstract

This paper's empirical results indicate that the average effect of antitakeover provisions on subsequent long-term investment is negative. The interpretation of these results depends on whether one thinks that there was too much, too little, or just the right amount of long-term investment prior to the antitakeover provision adoption. We use agency theory to devise more refined empirical tests of the effects of antitakeover provision adoption by managers in firms with different incentive and monitoring structures. Governance variables (e.g. percentage of outsiders on corporate boards, and separate CEO|chairperson positions) have an insignificant impact on subsequent long-term investment behavior. However, consistent with agency theory predictions, managers in firms with better economic incentives (higher insider ownership) tend to cut subsequent long-term investment less than managers in firms with less incentive alignment. Furthermore, managers in firms with greater external monitoring (due to higher institutional ownership) also tend to cut subsequent long-term investment less than managers in firms with less external monitoring. Thus, the decrease in subsequent long-term investment is significantly less for firms where the managers have greater incentives to act in shareholders' interests. Finally, there are interesting effects of the control variables. First, high book equity|market equity firms cut total long-term investment more. Second, firms that were takeover targets or rumored to be takeover targets cut long-term investment more. These results suggest that inefficient firms cut long-term investment more when an antitakeover provision is adopted. © 1997 John Wiley & Sons, Ltd.

Suggested Citation

  • James M. Mahoney & Chamu Sundaramurthy & Joseph T. Mahoney, 1997. "The effects of corporate antitakeover provisions on long-term investment: empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(5), pages 349-365.
  • Handle: RePEc:wly:mgtdec:v:18:y:1997:i:5:p:349-365
    DOI: 10.1002/(SICI)1099-1468(199708)18:5<349::AID-MDE835>3.0.CO;2-P
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    Citations

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    Cited by:

    1. M. Pilar Socorro, 2009. "R&D investment as a signal in corporate takeovers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(5), pages 335-350.
    2. Tsung-ming Yeh, 2014. "The effects of anti-takeover measures on Japanese corporations," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 757-780, May.
    3. Taylan Mavruk & Evert Carlsson, 2015. "How long is a long-term-firm investment in the presence of governance mechanisms?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 5(1), pages 117-149, June.
    4. Marcel Canoy & Yohanes E. Riyanto & Patrick Van Cayseele, 2000. "Corporate takeovers, bargaining and managers' incentives to invest," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 1-18.
    5. Alfredo M. Bobillo & J.A. Rodríguez‐Sanz & F. Tejerina‐Gaite, 2018. "Corporate governance drivers of firm innovation capacity," Review of International Economics, Wiley Blackwell, vol. 26(3), pages 721-741, August.
    6. Wei Shi & Brian L. Connelly & Robert E. Hoskisson, 2017. "External corporate governance and financial fraud: cognitive evaluation theory insights on agency theory prescriptions," Strategic Management Journal, Wiley Blackwell, vol. 38(6), pages 1268-1286, June.
    7. Sheikh, Shahbaz, 2018. "Is corporate social responsibility a value-increasing investment? Evidence from antitakeover provisions," Global Finance Journal, Elsevier, vol. 38(C), pages 1-12.
    8. Brian L. Connelly & Wei Shi & Jinyong Zyung, 2017. "Managerial response to constitutional constraints on shareholder power," Strategic Management Journal, Wiley Blackwell, vol. 38(7), pages 1499-1517, July.
    9. Xiao, Gang, 2013. "Legal shareholder protection and corporate R&D investment," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 240-266.
    10. Yasemin Kor & Joseph Mahoney & Sharon Watson, 2008. "The effects of demand, competitive, and technological uncertainty on board monitoring and institutional ownership of IPO firms," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 12(3), pages 239-259, August.
    11. Chen, I-Ju & Hsu, Po-Hsuan & Wang, Yanzhi, 2022. "Staggered boards and product innovations: Evidence from Massachusetts State Bill HB 5640," Research Policy, Elsevier, vol. 51(4).
    12. Chakraborty, Atreya & Rzakhanov, Zaur & Sheikh, Shahbaz, 2014. "Antitakeover provisions, managerial entrenchment and firm innovation," Journal of Economics and Business, Elsevier, vol. 72(C), pages 30-43.
    13. Kor, Yasemin Y. & Watson, Sharon & Mahoney, Joseph T., 2004. "Industry Effects on the Use of Board and Institutional Investor Monitoring and Executive Incentive Compensation," Working Papers 04-0108, University of Illinois at Urbana-Champaign, College of Business.
    14. Stéphane Lhuillery, 2006. "The impact of corporate governance practices on R&D efforts: a look at shareholders’ rights, cross-listing and control pyramid," CEMI Working Papers cemi-report-2006-006, Ecole Polytechnique Fédérale de Lausanne, Collège du Management de la Technologie, Management of Technology and Entrepreneurship Institute, Chaire en Economie et Management de l'Innovation, revised Apr 2009.
    15. Esra Memili & Kaustav Misra, 2015. "Corporate Governance Provisions, Family Involvement, and Firm Performance in Publicly Traded Family Firms," IJFS, MDPI, vol. 3(3), pages 1-36, July.

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