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Information to Users INFORMATION TO USERS The most advanced technology has been used to photograph and reproduce this manuscript from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand corner and continuing from left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6" x 9" black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. University Microfilms International A Bell & Howell Information Company 300 North Zeeb Road, Ann Arbor, Ml 48106-1346 USA 313/761-4700 800/521-0600 Order Number 910S075 Antitakeover amendments as alternatives to costly signalling Borokhovich, Kenneth Aubrey, Ph.D. The Ohio State University, 1990 UMI 300 N. ZeebRd. Ann Arbor, MI 48106 ANTITAKEOVER AMENDMENTS AS ALTERNATIVES TO COSTLY SIGNALLING DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Graduate School of the Ohio State University by Kenneth A. Borokhovich, B.A., M.B.A. * * * * * The Ohio State University 1990 Dissertation committee: Approved by t Rene M, Stulz foiWlk K.C. Chan Advisor Ralph A. Walkling Graduate Program in Business Administration My Family ACKNOWLEDGEMENTS I express sincere appreciation to my advisor, Dr. Rene M. Stulz, for his patience and guidance during the conduct of this research. The assistance and guidance of the other members of my committee, Dr. K.C. Chan and Dr. Ralph A. Walkling, are also greatly appreciated. Earlier versions of parts of this dissertation were presented in workshops at Case Western Reserve University, Michigan State University, The Ohio State University and Texas Christian University. I would like to thank Professors Christopher Barry, Stephen Buser, Margaret Forster, Tom George, and David Mayers as well as the participants in the workshops for their comments and suggestions. My thanks to Yiu Ming (Richard) Chung and Michel Glower for their invaluable assistance in computer programming. To my wife, I offer my gratitude for the support and understanding yo*i provided. To my family, my thanks for never showing doubt that 1 would succeed. iii VITA February 23, 1950 -------- — Born - Amityville, New York. 1972 ------------------------------B.A. In Humanities, The Ohio State University, Columbus, Ohio. 1972-1984--------------------------Commissioned Officer, U.S. Army. 1986 ------- ---------------------- M.B.A. in Finance and International Business, The Ohio State University, Columbus, Ohio. 1986-Present --------------------- Graduate Associate and Doctoral Student in Finance, The Ohio State University, Columbus, Ohio. FIELDS OF STUDY Major Field: Business Administration Mergers and Acquisitions, Capital Structure, and Agency Costs Minor Field: Economics. iv TABLE OF CONTENTS DEDICATION.......................... ii ACKNOWLEDGEMENTS............................. -............. iii VITA ............................................... iv LIST OF TABLES ........... -............................... vii PAGE I. INTRODUCTION............................ 1 II. DESCRIPTIONS OF ANTITAKEOVER AMENDMENTS AND HYPOTHESES COMMON TO STUDIES OF ANTITAKEOVER AMENDMENTS ..................................-........ 5 III. REVIEW AND DISCUSSION OF THE FINANCIAL LITERATURE ADDRESSING ANTITAKEOVER AMENDMENTS ....... 20 IV. AN EXPLANATION OF THE IMPERFECT INFORMATION HYPOTHESIS -.......... - - - 48 V. TESTABLE IMPLICATIONS CONCERNING MANAGEMENT'S OBJECTIVE IN PROPOSING AN ANTITAKEOVER AMENDMENT ---- 61 VI. A STATISTICAL DESCRIPTION OF FIRMS PROPOSING SUPERMAJORITY AND FAIR-PRICE AMENDMENTS............ 75 VII. EMPIRICAL RESULTS OF TESTS OF THE IMPLICATIONS OF MANAGEMENT'S OBJECTIVES ...................... 78 VIII. TESTABLE IMPLICATIONS CONCERNING THE MAGNITUDE OF CHANGES IN FIRM EQUITY VALUE ON PROPOSAL OF AN ANTITAKEOVER AMENDMENT ............. 83 IX. EMPIRICAL RESULTS OF TESTS OF THE IMPLICATIONS CONCERNING CHANGES IN FIRM EQUITY V A L U E .............. 104 X. SUMMARY AND CONCLUDING REMARKS....................... 115 v TABLES .......... LIST OF REFERENCES LIST OF TABLES TABLE PAGE 1. Frequency Distribution of Proposed Antitakeover Amendments for a Sample of 142 Firms from 1978 to 19B6 ........... -................ -................. 120 2. Descriptive Statistics for a Sample of 142 Firms Proposing Antitakeover Amendments from 1978 to 1986 -- 121 3. Distinguishing Characteristics of Firms Proposing Antitakeover Amendments --------- 122 4. Abnormal Returns Around the Proposal of an Antitakeover Amendment---------------- --------------- 123 5. Discriminant Testing of Cumulative Abnormal Returns Around the Proposal of an Antitakeover Amendment ---- 124 6. Discriminant Capabilities of Ownership Structure and Board Composition on Proposal of an Antitakeover Amendment--------------------------------------------- 125 7. Tests of Relations Between Abnormal Returns, and Ownership Structure and Board Composition......... 126 8. Tests of Relations Between Abnormal Returns, and Ownership Structure and Board Composition Conditioned on ROA .......... -..................... -............. 129 9. Discriminant Capabilities of Ownership Structure, Board Composition and ROA on Proposal of an Antitakeover Amendment --------- 131 10. A Test of Differences in Relations Between Abnormal Returns and Management's Equity Holdings, Controlling for Directorships ...... 133 11. A Test of Differences in Relations Between Abnormal Returns and Management's Equity Holdings, Controlling for Blockholdings ----------- 135 vii CHAPTER X INTRODUCTION The large number of mergers and acquisitions in the decade of the 1980's has generated a great deal of interest in the takeover defenses employed by target firms. Among these defenses are so-called "antitakeover" amendments to corporate charters and by-laws. Proposed by management and approved by stockholders, antitakeover amendments increase the bidder's cost in the event of a takeover. Whether an amendment is beneficial or detrimental to the adopting firm is a subject of controversy. Proponents of antitakeover amendments, most notably the managers of firms that are potential targets, argue that target stockholders are at a disadvantage in a takeover. The bidder may have information the target firm is undervalued by the market. Management also has the Information, but is unable to convey it to the target's stockholders. Target stockholders will then accept a bid that is lower than they would require If they had the same information as the bidder. Alternatively, the bidder may take advantage of the barriers caused by the high costs of collusion among diffuse target stockholders to gain control of the firm for a lower value than had target stockholders colluded to negotiate as a block. An antitakeover amendment eliminates 1 2 the bidder's advantage by forcing the bidder to pay more for the target either through negotiations with management or in a tender offer to target stockholders. Opponents of the amendments argue that the takeover market has a disciplinary effect on management. Management that does not perform in the best interests of the firm's stockholders is ousted in favor of managers who will. By making a takeover more difficult, an antitakeover amendment decreases the disciplinary pressure on management. Decreased disciplinary pressure reduces the incentive for management to work in the best interests of the firm's stockholders. These opposing views have given rise to three questions that have been examined in the financial literature. 1) Why does management propose an antitakeover amendment? 2) Why do stockholders support or oppose the amendment? 3) What effect does an amendment have on the value of the firm? As explained in Chapter II, no satisfactory answers have been found for these questions. This paper proposes answers to these questions that are not entirely consistent with the arguments of either proponents or opponents of antitakeover amendments. The answer to the first question is that management proposes an amendment either in the best interests of the firm's stockholders or to reduce the disciplinary pressure of the takeover market. Stockholders then 3 support or oppose the amendment based upon their assessment of management's intent. Some stockholders are assumed to be less informed than others, and therefore less adept at determining management's intent. An amendment proposed by management seeking to reduce disciplinary pressure is approved if a sufficient number of less informed stockholders are present and mis-assess management's intent. In this case, the effect on the
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