Corporate Antitakeover Defenses Description Brickley/Lease/Smith (1988), Table A.1. Example: Poison Pills Firms issue rights to shareholders. These rights allow shareholders to purchase shares in surviving firm (bidder) at a substantial discount (50%) from the market price. However, (target) firm’s directors can postpone date when these right become exercisable. 1 1

Are corporate antitakeover defenses in the interest of shareholders? No. Discourages takeovers (lowers probability of a takeover). Yes. Encourages higher premia. Target managers’ bargaining position improves. Of course, since shareholders have to vote to approve such defenses. 2 2

Earlier studies: Zero market reaction. Stock Market’s reaction to announcements of corporate antitakeover defenses. Earlier studies: Zero market reaction. Tale (Tail !) of the dogs that did not bark! Did the stock market anticipate announcements of corporate antitakeover defenses? Bhagat-Jefferis (1991): Yes. Table 7. After adjustment for anticipation: -1% 3 3

Brickley/Lease/Smith (1988) Over 95% of management-sponsored antitakeover provision proposals pass. Who votes for such proposals? (Table 2) Managers and directors. Pressure-sensitive institutions (insurance companies, bank trusts) Who votes against such proposals? Unaffiliated blockholders. Pressure-resistant institutions (public pension funds, mutual funds, endowments). Question: Costs on shareholders of understanding firm-value consequences of these and other proposals on a proxy statement. 4 4

Over 95% of management-sponsored proposals pass? Why? Bhagat/Jefferis (1991): Managers only propose amendments that are (very) likely to pass. Table 7: As votes controlled by ESOPs (affiliated investment plans) increases, managers are more likely to propose antitakeover amendments. Table 7: As votes controlled by CEO/officers/directors increases, managers are less likely to propose antitakeover amendments. 5 5

Table 7: As votes controlled by CEO/officers/directors increases, managers are less likely to propose antitakeover amendments. Why? Do not want to discourage takeovers (and associated premia). As they own more shares, less concerned of a hostile takeover and job-loss. 6 6

Relational Investing and Firm Performance Bhagat-Black-Blair (2001) Institutional investors (mutual funds, pension funds) have not been very effective in increasing long-term shareholder value. Why? Business acumen of institutional investors. Incentives of institutional investors. 6 6

Hedge Fund Activism, Brav-Jiang-Kim (2010) Differences between Institutional investors (mutual fund managers, pension fund managers) and Hedge fund managers Business acumen. Incentives: a) Performance fees: 20% of excess returns b) Significant investment of their personal funds in the hedge fund 6 6

Incentives: a) Performance fees: 20% of excess returns Differences between Institutional investors (mutual fund managers, pension fund managers) and Hedge fund managers Business acumen. Incentives: a) Performance fees: 20% of excess returns b) Significant investment of their personal funds in the hedge fund Regulation: Hedge funds do not have to be well-diversified (can own large positions in target firm). Fewer conflicts of interest. Longer investment horizon. 6 6