University of Mannheim

Transcription

1 Do Hostile Takeovers Stie Innovation? Evidence from Antitakeover Legislation and Corporate Patenting Julian Atanassov, published in the Journal of Finance in June 2013

2 Introduction Capital markets can promote economic growth via at least 2 channels 1 Alleviating nancial constraints & nancing protable projects 2 Providing incentives for managers through their monitoring and disciplining mechanisms Counterargument (Holmstrom, 1989): Capital markets might pressure top managers to focus on short-term projects and neglect innovation (and thus growth) This paper: How does the threat of hostile takeovers impact innovation? Hostile takeovers are one of the strongest corporate governance mechanisms to discipline managers

3 Two contrasting predictions 1 If threat of hostile takeover is reduced, managers will innovate less. Moral hazard (agency). Managers that are not monitored by shareholders will shirk and invest more in routine projects. 2 If threat of hostile takeover is reduced, managers will innovate more. Incomplete contracts. When takeover threats are high, incumbent managers have less power vis-a-vis shareholders. Incumbent managers fear a hostile acquirer will dismiss them after innovation is created. Asymmetric information. Shareholders cannot properly evaluate investments in long-term innovative projects and therefore undervalue the rm. Increases threat of hostile acquisition. Managers invest less in innovative projects (protection).

4 Data & Methodology (i) Main sample: 101,700 rm years based on 13,339 rms Sample period: Innovation data from NBER patent database Company data from Compustat Firms with no patent also included (alleviates sample selection concerns) Dierence-in-dierences analysis Treatment indicator: Business Combination (BC) Law Anti-takeover laws shift power from shareholders to managers. BC laws very restrictive, since they impose a 3 to 5 year moratorium on certain types of transactions between the rm and a large shareholder that obtains more than a specied percentage of the shares (e.g., mergers, divestitures, asset sales)

5 Data & Methodology (ii) Main dependent variable: proxy for innovation (output) Patent = number of patents per rm-year divided by mean number of patents for the same year Patent citations = number of patent citations divided by average number of citations in the same cohort (year or technology class) y isk(t+n) = α t + β i + γbc st + δx iskt + ɛ iskt i indexes rm, s indexes state of corporation, k indexes state of location, t indexes time y isk(t+n) is either log(1 + Patent) or log(1 + Citations/Patent Time ) n is the number of years after current period (n = 3 or n = 4) BC st is a dummy equal to one if anti-takeover law has been enacted by time t in state s X iskt is a vector of control variables β i is a rm xed eect, α t is a year xed eect (economy-wide shocks)

6 Di-in-di revisited What is the main idea behind dierence-in-dierences? Could look at number of innovations before and after law is introduced in state s (say, Massachusetts) but: economy-wide shocks could occur at the same time Compare development of innovation activity in state s to that in a control state (say, California) in which law has not been introduced

7 Main Results (i) Firms incorporated in states that pass a Business Combination law innovate less after the law relative to rms incorporated in states that do not pass a BC law. The number of patents decreases after Business Combination law is passed: by 11.23% 3 years later, by 14.41% 4 years later Citations per patent decrease as well: by 16.43% 3 years later, by 20.94% 4 years later No evidence that supports reverse causality (less innovative rms lobbying for BC law to prevent takeover) No trend of declining innovation before enactment of BC in a state

8 Main Results (ii)

9 Additional Results (i) 1 Firms with stronger alternative governance mechanisms experience a smaller decline in innovation Look at presence of large shareholder or pension fund, managerial career concerns measured by leverage, and product competition Large shareholder and pension fund almost completely compensate for negative eect of introduction of Business Combination law (no main eect included in regression) 2 Back of the envelope calculation: 2.92% reduction of rm value because of the decline in number of citations triggered by enactment of Business Combination law No. of citations per patent decreases by 20.94% One more citation per patent is associated with a 14.20% increase in Tobin's Q

10 Additional Results (ii)

11 Conclusion Firms located in states that pass anti-takeover laws innovate less after the law is passed compared to rms in control states Hence: 1 Hostile takeovers are benecial for innovation (and therefore growth) 2 Alternative governance mechanisms can serve as substitutes for lack of takeover threat 3 New evidence on how capital markets and corporate governance aect economic growth

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