Determinants and Effects of Antitakeover Provisions on Corporate Governance and Firm Performance

Abstract

This thesis analyses and groups antitakeover provisions as they relate to CEO’s monetary benefits. It specifically focuses on the six provisions that were proposed by Bebchuk et Al. (2009) to conversely affect firm value. Although all provisions provide managers with a takeover protection, some provisions provide managers with a monetary outcome (Category A provisions) if a takeover was successful while others do not (Category B provisions). Findings indicate that CEOs with a role duality use their power to influence the adoption of takeover defences that provide them with a monetary outcome. Moreover, in the presence of CEO duality, the relationship between Category A provisions and firm value worsens. On the other hand, the relationship between Category B provisions and firm value is unaffected by the presence of CEO duality. This suggests that CEOs having a role duality do not feel the need to work in the shareholders’ best interest when entrenched with Category A provisions.

The second model of this thesis explains the conflicting evidence found on agency theory in previous literature. This is achieved by introducing interaction variables between three of the main governance mechanisms used to mitigate agency problems: Shareholder rights, CEO ownership and board independence. Findings suggest that board independence and the market for corporate control act as substitutes. Board independence has a positive effect on firm value for firms with a weak governance structure. For firms having high levels of governance and shareholder rights, no extra monitoring by independent directors is needed. Such firms could benefit more from the firm-specific knowledge of insider directors. Results also show that both takeover defences and CEO ownership increase managerial power. Therefore, providing CEOs with antitakeover provisions and high levels of ownership increases the entrenching effect of CEO ownership on firm value.

The overall findings of this thesis indicate that internal and external governance mechanisms interact in affecting firm performance. Suggestions of agency theory (increasing CEO ownership, increasing board independence and removing CEO duality) are valid for firms with low levels of external governance and shareholder rights. On the other hand, firms that are already enjoying a good level of governance benefit from providing managers with more power and leadership roles that are in line with the stewardship theory.