“Managerial Entrenchment and Merger Waves.”

Finance

Further details

This paper documents a novel agency cost that arises because managers of potential takeover targets forgo merger opportunities in industry merger waves. We present comprehensive evidence that the entrenchment effect of classi…ed board varies dynamically over time by industry. While the e¤ect is strongly economically signi…cant in years when industries are undergoing a synergistic merger wave, it is muted in years when synergistic industry M&A activity subsides.

In wave industry-years, …rms without classi…ed board are more than three times as likely to receive a takeover bid compared to …rms with classi…ed board. This difference is even larger for less anticipated waves and for …rms that also have a high level of takeover protection based on the GIM index of Gompers, Ishii, and Metrick (2003).

By contrast, the difference in takeover odds is an order of magnitude smaller and not statistically signi…cant in non-wave industry-years. These results are driven by economic, technological, and regulatory shocks that create economic opportunities to merge in the industry. Overall, our evidence broadens the classical agency view and suggests that the agency cost of classi…ed boards varies signi…cantly over time.

Download the paper - Managerial Entrenchment and Merger Waves