Motivation for Adopting Takeover Defense Measures: Testing of entrenchment hypothesis for corporate managers

Author Name TAKIZAWA Miho  (Postdoctoral Fellow, Japan Society for the Promotion of Science) /TSURU Kotaro  (Senior Fellow, RIETI) /HOSONO Kaoru  (Professor, Faculty of Economics, Gakushuin University)
Creation Date/NO. August 2007 07-J-033
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In this paper we analyze the characteristics of firms that introduced hostile takeover defense measures in fiscal years 2005 and 2006. We analyze the motivation for adopting these measures after categorizing it as either (1) depressed corporate performance, (2) self-protection for corporate managers, or (3) other factors affecting the probability of being the target of a takeover, and we derive the following findings. First, companies at which performance has deteriorated, as measured by such yardsticks as ROA and Tobin's q, do not necessarily adopt takeover defense measures. Second, companies that are older-established, have lower proportions of shares held by their directors, or higher cross-shareholding ratios are more likely to adopt takeover defense measures, which suggests that the adoption of such measures is influenced by self-protection on the part of corporate managers and conflicts of interest with shareholders. Third, companies with low ratios of controlling shareholders or high ratios of holdings by institutional investors are more inclined to adopt takeover defense measures, as are companies in which the shareholding structure is such that their shares are liquid and easy to acquire.

From this, it can be seen that anti-takeover measures are not necessarily adopted as a "shield" or "entrenchment" against growing takeover threats resulting from negligence on the part of management. But the finding that companies with higher cross-shareholding ratios adopt takeover defense measures more readily is strong evidence of the self-protective nature of corporate managers.

It is pointed out that the practice of cross-shareholding by Japanese companies has been reemerging recently amid the emergence of hostile takeovers in Japan. It appears that companies at which management has already dug entrenchments by means of cross-shareholding are seeking to reinforce those entrenchments by adopting anti-takeover measures, but it should also be noted that the adoption of measures of this kind involves a burden of fixed costs that could greatly disadvantage small companies. In view of this, it is important also to consider the approach (Tsuru 2006) that involves preventing abusive takeovers by strengthening the takeover bid rules (in particular the mandatory bid rule) as an alternative to the adoption of poison pill-type anti-takeover measures by individual companies.