Jonathan M. Karpoff is Professor of Finance at University of Washington Foster School of Business. This post is based on a recent paper authored by Professor Karpoff; William C. Johnson, Assistant Professor of Finance at Suffolk University Sawyer Business School; and Sangho Yi, Sogang University. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here); The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang.
Are takeover defenses good or bad for shareholders? The answer depends on whom you ask. Many researchers find support for the view that takeover defenses entrench managers and decrease firm value (e.g., Gompers, Ishii and Metrick (2003), Masulis, Wang, and Xie (2007), Bebchuk, Cohen and Ferrell (2009)). But others find that takeover defenses are associated with improved value and performance (e.g., Linn and McConnell, 1983; Caton and Goh, 2008; Chemmanur and Tian, 2013; Smith 2013). In this paper, we propose that takeover defenses confer costs and benefits to a firm’s shareholders that change in systematic ways as the firm ages. Previous findings are mixed because they do not account for this lifecycle effect in takeover defenses.
