1. At the heart of any free economy is its capital markets. Investors put their money in these capital markets with the expectation of a return on their investment. What assurance do these investors have that they will receive a fair return on their investment? Corporate governance is the set of processes and procedures that ensures investors a fair return on their investment. In practical terms, corporate governance includes n the articles of incorporation of the company, n the mechanics of the election of the board of directors, n the responsibility of the board to act as fiduciaries of the shareholders, n the responsibility of the board to hire, compensate, and fire senior management, and the public auditors of the company.

2. Corporate Antitakeover Defenses n Description n Brickley/Lease/Smith (1988), Table A.1. n Example: Poison Pills n 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.

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

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

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

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

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