What do managers do when immune from hostile takeover threats?

Abstract

This paper adopts the mid-1990s Delaware antitakeover regime shift as a natural experiment to examine how the removal of hostile takeover threats affects managers’ decisions on corporate financing and investment, and how it impacts on firm value. Our Differences-in-Differences-in-Differences analysis shows that, consistent with managerial agency models of capital structure and the free cash flow hypothesis of Jensen (1986), managers use lower debt financing and make higher capital expenditures and corporate acquisitions when protected from takeovers. These entrenched behaviors destroy firm value. In addition, we find the impacts of the exogenous changes in market control are more significant for firms with lower managerial ownerships or lower institutional holdings, lending supports to the arguments of Jensen (1993) that effective internal control systems can alleviate the negative impacts of weakened capital market controls.