Does antitakeover protection reduce myopic managerial investment behavior?
Critics of antitakeover amendments argue that by removing the threat of takeover, antitakeover amendments also remove the disciplining mechanism of the takeover market. Without this disciplining mechanism, managerial decisions may not coincide with shareholder interests. Instead, managers may either continue their current investment behavior or reduce investments, in favor of opportunistic behavior.
This study provides an alternative measure of how antitakeover amendments affect myopic behavior. We investigate the effect of antitakeover amendments on analyst forecasts of the capital spending of a firm. We find that financial analysts do not significantly alter their expectations regarding future capital spending for firms which pass antitakeover amendments. For the complete sample, we find no significant departures from industry norms for capital spending. Furthermore, a comparison of nonfair price and fair price amendments shows no significant differences from industry means for capital spending. Indeed, the results of the comparison breakdown mirror the full sample findings.
The remainder of the article is organized as follows. In the next section, a description of antitakeover amendments is provided and implications for investment behavior are discussed, followed by a review of the literature. Next, the hypotheses are developed and the sample selection and characteristics are discussed. The results are then presented, and last, conclusions are offered.
ANTITAKEOVER AND MYOPIC BEHAVIOR
Antitakeover charter amendments are amendments to a firm's charter which are passed by a vote of the common stockholders of the firm. These amendments modify the rights and possible activities of the firm's stakeholders. Stakeholders include target firm management as well as shareholders. Antitakeover charter amendments are classified in four categories: (i) supermajority amendments, (ii) classified boards, (iii) authorization to issue preferred stock and (iv) fair price amendments. The first three amendment types are referred to as "non-fair" price amendments. Of these amendments, the supermajority amendment reqiures an affirmative vote from 66-90% of voting stock for a control transaction to occur. On the other hand, the classified board amendment staggers the election of the board of directors so that only a fraction (typically a third) of the board of directors can be elected at a given point in time. Thus, with a classified board amendment it may take up to two years for an outside party to gain control of the board. The third type of amendment, authorization to issue preferred stock, enables the firm's board to issue preferred stock with special provisions to existing shareholders if a triggering event, such as a tender offer, occurs. For example, a board may issue rights enabling shareholders to purchase either new preferred stock or shares of the merged firm at a substantial discount. In this case, a merger may become prohibitively expensive. Finally, the fair price amendment requires that the bidder pay a "fair" price for all purchased shares. Typically, this price is defined as the highest price paid by the bidder for target shares it has acquired. Failure to offer a "fair" price triggers the supermajority requirement. The fair price amendment eliminates two-tier tender offers, forcing potential bidders to negotiate with management.
As to proponents of antitakeover amendments, all four types of amendments allow managers to place their efforts in long-term strategies, versus short-term profits. With the protection afforded by an antitakeover amendment, managers can focus on projects that yield delayed benefits. Alternatively, Comment and Schwert (1995) state that antitakeover measures are unlikely to alter a firm's probability of being acquired and are not a significant tool for management to entrench and protect themselves. They base this conclusion on the finding in their study that management imposed antitakeover measures such as "poison pills" had no statistically significant impact on the actual levels of takeovers for their sample of firms.(1) However, it should be noted that poison pills may differ dramatically from antitakeover charter amendments. Poison pills are instituted by a board of directors, often at the urging of the CEO and without shareholder approval. On the other hand, antitakeover amendments do require shareholder approval. These amendments provide managers with greater assurance of continued longterm employment than poison pills do because managers perceive these amendments as shareholder-supported agreements. Therefore, it is relevant to consider how shareholder approved antitakeover measures could impact management's desire to invest in the long-run.
The idea that managers exhibit myopic behavior when faced with the existence of costly information and takeover threats finds support in Stein's (1988) model of management behavior. In Stein's view, if markets undervalue long-term projects, whose true value is known only to managers, firms with a long-term orientation may become takeover targets. Consequently, managers who do not want their firms to be acquired may avoid undertaking long-term projects, instead favoring short-term gains to lessen the probability of a takeover. Furthermore, Stein's model shows that managers who are sheltered from takeover risk are more likely to engage in long-term projects that have higher net present value. Therefore, these managers can focus on profitable projects and increase overall investment rates.
However, not all researchers believe that antitakeover amendments provide shareholder benefits. Some antitakeover amendment critics believe that because managers feel protected under these amendments, these managers may be more inclined to be lax or opportunistic. This view is illustrated in Jensen and Meckling's (1976) agency model. Specifically, Jensen and Meckling argue that principal-agent conflicts stem from the separation of ownership and control in the modern corporation. Because managers usually do not own the corporations, they may engage in self-serving behavior, such as excessive perquisite consumption, empire building, or non-optimal risk taking. In the long run, such behavior leads to lower, possibly negative, net present value projects. Several mechanisms control such principal-agent conflicts, including the disciplining mechanism of the takeover market (Grossman and Hart, 1980; Easterbrook and Fischel, 1981; Manne, 1965; Fama and Jensen, 1983a, 1983b; Jensen and Ruback, 1983). The takeover market disciplines firms through the possibility that poorly managed firms may be acquired, and their management replaced by a more efficient one. In this case, antitakeover amendments thwart the disciplining mechanism and thus allow management free reign over a firm. Under this view, management's investment behavior may be either unaltered by the adoption of antitakeover amendments or possibly even reduced as managers fail to take full advantage of profitable long-term investments.
Several researchers have investigated the possibility that other corporate governance factors such as stock ownership structure and board composition may help to determine the likelihood that a firm will adopt an antitakeover measure, such as a poison pill or antitakeover amendment, and the extent to which such measures will impact the firm. Mallette and Fowler (1992) found that firms are more likely to adopt poison pills when inside directors' stock holding level is low, and Loh (1994) finds that 85.9% of firms that adopt poison pills have boards that are dominated by outside directors. This result may indicate that managers are more interested in obtaining long-term employment contracts, such as those provided by antitakeover measures, when insiders have less control over the major corporate governance decisions in the firm. Rechner, Sundarmurthy and Dalton (1993) and Sunduramurthy (1996) find additional evidence that corporate governance variables are important in determining whether or not a firm will have antitakeover measures. They find that board composition, type of board leadership, officer and director holdings, institutional holdings, number of majority owners, and the existence of severance agreements for managers all differ between antitakeover amendment adopting firms and firms which do not adopt antitakeover amendments. They conclude that the governance structure is very important in determining the likelihood that a firm will have an antitakeover amendment. In further research Duggal and Miller (1994) find that the type of institutional investors that the firm has also impacts the rate at which antitakeover amendments are adopted and they conclude that institutional investors who are less "pressure sensitive" are more likely to vote for the amendments. The less pressure sensitive investors tend to be more long-term oriented. Finally, Malezadeh and McWilliams (1995) find that whether or not corporate governance structure is efficient determines whether or not the impact of the adoption of antitakeover amendments is potentially positive in terms of firm value. In summary, the studies indicate that governance and ownership structure influence managers' desire for long-term employment contracts.
Managerial behavior studies look at both investment behavior and firm performance. For example, Meulbroek, Mitchell, Mulherin, Netter and Poulsen (1990) and Pugh, Page and Jahera (1992) examine post-antitakeover amendment expenditures on research and development (R&D) in firms. These studies investigate whether the job security afforded managers by antitakeover amendments encourages those managers to be less myopic in their investment decisions. Under this view, Stein predicts that both capital expenditures and R&D should increase subsequent to the adoption of antitakeover charter amendments. The above mentioned studies provide contradictory results regarding Stein's (1988) hypothesis. On the one side, Meulbroek et al. (1990) find that industry-adjusted R&D expenditures decrease (relative to sales) for firms that adopt antitakeover amendments. Conversely, Pugh et al. (1992) find that both R&D and capital expenditures rise after amendment adoptions, a result that supports the shareholder interests hypothesis. These different results may reflect the different R&D expenditure measures in each study. It should be noted that the different results in these studies may be due to the use of a broader measure of R&D expenditures (namely, capital expenditures) in the Pugh et al. study. Further, the Muelbroek et al. study drops firm from industry adjustment that had less than $10,000 in R&D expenditures. It is not readily apparent whether a similar screen is used for firms adopting antitakeover amendments. If not, the industry norms would tend to be inflated, causing them to lower R&D expenditures for firms announcing antitake-over amendments.
In addition, Johnson and Rao (forthcoming) study financial performance around the time of antitakeover amendments. They examine R&D expenditures and capital spending. In their study, they find that firms exhibit no significant change in industry adjusted levels of R&D or capital expenditures in each of the five years after the adoption of antitakeover charter amendments. However, their results for (unadjusted) R&D and capital expenditure levels show significant positive and negative changes, respectively. Additionally, Johnson and Rao's analysis, on an industry adjusted basis, shows no significant effects for either R&D or capital spending for fair and nonfair price amendments. Overall, Johnson and Rao conclude that antitakeover amendments are not associated with deleterious effects to shareholders.
In sum, the above studies, while meaningful, do not provide conclusive evidence about the impact of antitakeover amendments on myopic decision making. Even though Stein (1988) suggests that examination of actual levels of capital spending or R&D should provide a sharp test of managerial farsightedness, such studies may be affected by potential shortcomings. For example, these studies may be subject to the existence of survivorship bias in their samples. To assess management behavior and firm performance changes accurately, these variables must be studied for a significant period of time after an antitakeover amendment has been adopted. Therefore, firms that do not survive for a long period after the adoption are not included in the samples. Thus, the survivorship bias may create a sample that omits those firms that are good takeover targets. The nature and magnitude of this potential bias is unknown because the studies in this area do not investigate the number and characteristics of firms that drop out of the sample due to the survivorship problem.
In this article, we provide an alternative test of Stein's hypothesis. Stein's hypothesis implies that long-term investment, R&D and capital expenditures should increase when managers are provided with long-term employment contracts, such as those which exist when antitakeover amendments are enacted. Specifically, we examine changes in analyst expectations for levels of capital spending made by the firm. To study these changes, we use three- to five-year forecasts by ValueLine analysts for capital spending. We were unable to examine expectations for future R&D because Valueline analysts do not report estimates for R&D. Therefore, we are able to examine expectations for one of the two investment measures suggested by Stein (1988). Since ValueLine forecasts reflect anticipated changes in future capital spending, our approach is robust to potential changes in takeover probability. Additionally, because analyst forecasts in the quarter after the amendment may be examined relative to those in the quarter before the amendment, our approach reduces the survivorship bias of previous studies. That is, within this time frame, none of the firms in the final sample either fail or are acquired.
ValueLine Forecasts and Myopic Behavior
ValueLine analyst forecasts are used to study the impact of antitakeover amendments on expectations of management's future capital expenditures. These forecasts provide information about the effect of antitakeover amendments on managers' firm investment levels. The myopic hypothesis predicts higher capital expenditure forecasts for firms with antitakeover amendments, because managers feel protected by these amendments. This approach assumes that analyst's forecasts of future investment incorporate relevant information, such as antitakeover amendments, into their forecasts quickly and efficiently. We assume that ValueLine analysts' projections provide unbiased forecasts of managerial behavior with respect to future capital spending.(2) If analysts can not be assumed to be efficient forecasters then all of the hypotheses examined in this study can be viewed as a joint hypothesis of analyst efficiency and investment changes. If forecasts of capital expenditures do not increase, then the myopic hypothesis would not be supported. Stein (1988) suggests that tests of the myopic hypothesis could involve an examination of actual changes in either capital spending or R&D expenditures. In this study, we focus on capital expenditure forecasts because ValueLine analysts do not provide separate forecasts for R&D. The absence of separate R&D forecasts from ValueLine is not surprising since, as Pugh et al. (1992) point out, many firms do not provide public information about their R&D expenditures; however, all public firms provide information about capital expenditures.
To test the primary thrust of the myopic hypothesis, we examine capital spending forecasts by ValueLine financial analysts in the quarter before the announcement of an antitakeover amendment to forecasts in the quarter after the antitakeover amendment. The forecasts represent an average annual forecast for the next three to five years. Although analysts do not forecast R&D expenditures, capital expenditure forecasts should be accurate and sufficient indicators of manager behavior. In fact, Pugh et al. (1992) argue that since many firms do not provide a separate accounting of research and development, capital spending is more likely to reflect managerial behavior changes than will research and development. The first hypothesis may be stated in the null form as:
H1: There is no change in the projected
level of capital spending after the
announcement of the antitakeover
The specific type of antitakeover amendment adopted or the period in which the amendment is adopted may influence the effect the antitakeover amendment has on myopic behavior. We examine fair price amendments and nonfair price amendments separately, because the categories may provide a different degree of job protection for managers. Specifically fair price amendments impact the price received by shareholders in the event of a takeover, thus reducing the "prisoner's dilemma" in the case of a two-tier tender offer.(3) On the other hand, nonfair price amendments make firm acquisition difficult, thus reducing the possibility of a takeover and increasing job security. Therefore, we expect that nonfair price amendments will have a larger positive impact on capital spending than fair price amendments. The second and third hypotheses may be stated in the null form, as:
H2: There is no change in the projected
level of capital spending for the
subsample of fair price amendment firms.
H3: There is no change in the projected
level of capital spending for the
subsample of non-fair price amendment
Our final set of hypotheses test whether or not the antitakeover amendment on myopic behavior is time period dependent. Our sample consists of antitakeover charter amendments adopted during the period 1979-1985. It would be interesting to see if structural changes occurred during heavy takeover periods, such as 1983-1985. Specifically in high takeover periods managers, regardless of their level of performance and competency, may be at high risk of displacement due to takeover threats. Antitakeover amendments may provide many managers with a relevant source of job protection during these periods when managers may loose their jobs for reasons other than poor performance. Likewise, in periods of light takeover activity managers who are performing adequately may have little to fear with respect to job loss and hence may be relatively unconcerned about the protection provided by these measures. The fourth and fifth hypotheses may be stated in the null form as:
H4: There is no change in the projected
level of capital spending for the
subsample firms with amendments in the
H5: There is no change in the projected
level of capital spending for the
subsample firms with amendments in the
SAMPLE AND METHODOLOGY
In their 1987 study Jarrell and Poulsen present abnormal return results for a sample of 649 antitakeover charter amendments adopted between 1979 and 1985. That sample of firms is used in this study. To determine analyst capital spending predictions, we use forecasts from the ValueLine Investment Survey. Using these forecasts eliminates 345 of Jarrell and Poulsen's sample of 649 firms (see Table 1) because ValueLine did not provide forecasts for these firms directly preceding and following the antitakeover amendment proxy dates. Despite the reduction in sample size, this condition was necessary to determine the percentage change in analysts' forecasts. We dropped an additional 32 firms from the sample because they were listed in the unassigned industry category. Unassigned firms do not have an appropriate peer group for comparison, since the unassigned group changes each quarter. Without a defined peer group, these firms cannot be examined for the effect of an antitakeover amendment after accounting for industry trends. Of the remaining firms, 29 firms that were followed by ValueLine did not have the estimates for capital spending provided by the analyst. Removing the above firms provides a maximum sample size of 243 firms.
TABLE 1 Sample Description
Original sample size 649 Number not followed by ValueLine 345 Number industry unassigned 32 Number where capital spending not reported 29 Total number of raw changes 243 Number with fewer than three other firms in the industry 6 Total number of industry-adjusted changes 237
Industry indices for changes in analysts' expectations during the pre-and post-antitakeover periods have been created from all of the nonsample firms on the ValueLine database, on a ValueLine industry basis. These indices are used as a control group with which to compare changes in expectations. Thus, an analyst's forecast after an antitakeover amendment is compared to both the pre-antitakeover capital spending expectation of the firm and a control group determined by analysts themselves. The inclusion of an industry adjustment (based on a minimum if three firms) reduces our sample size by an additional six firms.
The change in the ValueLine forecast for capital spending surrounding the antitakeover amendment is calculated to study the impact of the antitakeover amendments on myopic investment behavior. Jarrell and Poulsen's (1987) list of proxy dates is used to identify the quarter of the announcement of the antitakeover charter amendment. With this information, we next identify the ValueLine publication date in the nearest quarter before the proxy date. The data from this publication are then used to determine the values of the projected variable for the base period. That is, we determine capital spending expectations prior to the declaration of the antitakeover amendment. Once the pre-amendment values are determined, we locate the post-amendment quarter ValueLine publication. The forecasts in this publication compared to the pre-amendment forecasts reflect the effect of the antitakeover amendment.
After calculating the ValueLine forecast changes we create an industry try-adjusted set of changes in forecasts. Studying the industry-adjusted changes is useful in separating industry specific influences, such as the well-being of the industry, from antitakeover amendment effects. Calculation of the industry-adjusted changes occurs as follows. First we identify all firms which are listed in the same ValueLine classified industry. Using all off-sample firms, we construct an industry average change over the period. This industry average change is then subtracted from the individual firm change to determine an industry-adjusted change. By accounting for industry-related changes, this adjusted measure more fully reflects the antitakeover amendment effect. The significance of the revision in the projected level of capital spending is assessed by the parametric t-test. The null hypothesis is that the mean revision in projected capital spending is zero. The parametric test is supplemented with the nonparametric signed rank test.
This study tests Stein's hypothesis that antitakeover amendments reduce myopic managerial behavior. We examine the three- to five-year analyst forecasts of capital spending, one of the two investment variables mentioned by Stein as a possible measure of farsightedness of investment behavior. If firms have higher capital spending forecasts after amendment adoption, our results will support the myopic hypothesis. However, if forecasts predict similar or lower capital spending after adoption, or capital spending forecasts that are similar to or lower than the control sample forecasts, then Stein's hypothesis does not find support in the analysis.
DISCUSSION OF RESULTS
Changes in the forecasts of financial analysts, as discussed in the hypotheses section, for the three- to five-year ahead forecasts one quarter before the antitakeover amendment versus forecasts in the quarter following the antitakeover amendment are examined in this section. The raw changes and industry-adjusted changes for the entire sample are discussed first. Raw changes provide an indication of significant movements in forecast capital spending for the entire sample. However, the industry-adjusted results can indicate changes in sample firm financial forecasts after perceived industry-induced changes are removed. Next, industry-adjusted subsample results for fair price versus nonfair price amendments are discussed to determine whether the type of antitakeover amendment affects forecasts of capital spending (and thus managerial motivation for the amendment adoption). Finally, subsample results for the periods 1979-1982 and 1983-1985 are presented to assess the effect of heavy antitakeover amendment adoption activity on capital spending forecasts.
The changes in capital spending estimates derived from capital spending forecasts, both raw and industry-adjusted, in the quarter before the proxy date versus the quarter after the proxy date are provided in Table 2 panel A. The table shows that the unadjusted change in capital spending is negative and statistically insignificant. Thus, the raw results do not support Stein's hypothesis. The industry-adjusted results provide a similar conclusion.(4) Specifically, no significant changes in capital expenditures are expected to occur, even after the industry effect has been removed. Consequently, we conclude that antitakeover protection may not provide incentives to increase the firm's level of capital expenditures. However, these results may not be interpreted as an acceptance of the null hypothesis but merely an inability to reject the null hypothesis. This result agrees with the results of Johnson and Rao (forthcoming) and Meulbroek et al. (1990) in finding no support for the myopic investing hypothesis and is at odds with Pugh et al. (1992) which reaches the opposite conclusion.
[TABULAR DATA 2 NOT REPRODUCIBLE IN ASCII]
Panel B of Table 2 provides additional descriptive statistics for the raw and industry adjusted changes in expectations for capital spending. The descriptive statistics show that the mean, median and mode percentage change in raw and industry-adjusted spending are all very close to zero. This tends to indicate that for the entire sample of firms the ValueLine analysts do not anticipate large increases or decreases in overall investment. By itself, these numbers may draw the reader to the conclusion that analysts do not revise their capital spending estimates for firms on a quarter-by-quarter basis. However, this would be an incorrect conclusion since an examination of the raw changes reveals that the lowest revision for a firm was almost a 100% decrease in capital spending and the highest was a dramatic 157% increase in anticipated capital spending. Further, the standard deviation for both raw and industry-adjusted measures is in excess of 30%, indicating that the revisions in forecasts are substantial. These numbers seem to suggest that analysts are often making revisions in their estimates of capital spending on a quarterly basis. This result is encouraging because active revision of forecasts is what would be anticipated if analysts' forecasts are efficient in a market in the U.S. stock market where new information is constantly arriving for analysts and investors.
Estimates of the mean percent changes in anticipated capital spending for the fair and nonfair price subsamples are provided in Table 3. Because these amendments provide different levels of management protection, they may have different effects on capital spending. However, for both fair and nonfair amendments the raw mean percent changes and the industry-adjusted results show insignificant antitakeover amendment effects. Therefore, we conclude that neither fair nor nonfair price amendments result in altered investment behavior on the part of managers. Thus, even nonfair price amendments, which decrease the likelihood of takeover, have no impact on perceived management behavior.
TABLE 3 Raw Mean Percent Changes in Selected Estimates One Quarter Ahead Fair Price Versus Non-fair Price
Variable Amendment Sample Mean t- Signed Type Size Percent Statistic Rank Change /100 [RAW.sup.1] capsp NFP 58 0.0278 0.6645 -2.0 FP 185 -0.0147 -0.6214 -10.5 IND [ADJ.sup.2] capsp NFP 56 0.0196 -0.5395 2.5 FP 181 -0.0401 -1.5238 2.0
Note: This table contains estimates of the percent change in long-run forecasts in the quarter before versus the quarter after the proxy date.
(1) Unadjusted raw percent change in capital spending.
(2) ValueLine industry-adjusted percent change in capital spending.
Estimates of the mean percent changes in projected capital spending for the 1979-1982 and 1983-1985 subsamples are presented in Table 4. Examination of the forecasts for the subsamples reveals that for the raw changes in capital spending no significant change can be discerned. However, for the industry-adjusted change in capital spending we find a negative and significant effect at the 10% level for the period 1983-1985 and a negative but insignificant effect in the period 1979-82. These results provide further evidence that myopic investment behavior does not decrease with the adoption of an anti-takeover amendment. In fact, there is weak evidence during the heavy takeover period when employment protection may be most valuable to managers that long-term capital spending actually falls after an amendment passes.
TABLE 4 Mean Percent Changes in Selected Estimates One Quarter Ahead 1979-82 Versus 1983-85
Variable Sample Mean t- Signed Size Percent Statistic Rank Change /100 [RAW.sup.1] capsp 1979-82 31 0.1042 1.1719 -0.5 1983-85 212 -0.0204 -1.0467 -12.0 IND [ADJ.sup.2] capsp 1979-82 29 -0.0011 -0.0121 -0.5 1983-85 208 -0.0400 -1.8560 5.0
(*) Significant at the 10% level.
Note: This table contains estimates of the percent change in long-run forecasts in the quarter before versus the quarter after the proxy date.
(1) Unadjusted raw percent change in capital spending.
(2) Valueline industry adjusted percent change in capital spending.
Many researchers and business practitioners have expressed concern that managers of U.S. corporations are too myopic in their decision making, especially with respect to levels of long-term investment. Stein and others have suggested that antitakeover amendments may provide managers with the incentive to become more farsighted in their investment behavior. They suggest that antitakeover amendments provide long-term employment contracts to managers and thus increase long-term employment optimism in management. They argue that when managers believe that they have long-term employment contracts they will invest more heavily in firm-specific human capital, improve their decision making and expand their investment time horizons. This expansion reduces myopic behavior, encouraging managers to pursue projects that may have large net present value but also high start-up costs and low short-run cash generating abilities. When managers believe they have long-term employment contracts they may undertake such projects because they believe that they ill not be penalized for poor short-run performance. However, other researchers argue that antitakeover amendments may have little effect on investment and may simply increase the welfare of the manager. Stein has presented a testable model of the view that long-term employment contracts lead to a reduction in myopic behavior. Specifically, Stein's model hypothesizes that when managers are provided with long-term employment contracts, as provided by antitakeover amendments, they will reduce their myopic behavior and this change in behavior will be seen as an increase in the firm's investment on capital spending and R&D.
In this study we provide a test of Stein's model. We find that myopic behavior, as reflected in analysts' projections of future capital expenditures, is not significantly impacted by the adoption of antitakeover amendments. Several previous studies have tested Stein's hypothesis by examining changes in the actual level of capital spending and research and development around the time of antitakeover amendment adoption and have provided mixed results. The mixed results seen in these studies may be the result of survivorship bias. The sample and data used in this study do not suffer survivorship bias. Thus, the results of this study provide an alternative picture of antitakeover amendment effects. The results have clear policy implications. Specifically, government policy makers, stake-holders and others who wish to induce managers to become more farsighted in their decisions should not look to antitakeover amendments or restrictive antitakeover laws because they are unlikely to affect investment behavior.
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Sunduramurthy, C. 1996. "Corporate Governance Within the Context of Antitakeover Provisions." Strategic Management Journal 7: 377-394. (1) Poison pill defenses involve the creation of securities that entitle their holders to special rights and privileges if the issuing firm becomes subject to a takeover bid. These securities usually provide the shareholders of the target firm with rights to buy additional shares to sell shares at attractive prices, thereby increasing the bidders cost of a successful takeover.
(2) Although we are not aware of any study that examines ValueLine analysts' ability to forecast firm capital spending, previous studies suggest that they do provide unbiased and more accurate forecasts of future earnings of the firm than extrapolative models (Brown and Rozeff, 1978). (3) A two tiered tender offer is a situation where the acquirer intends to purchase the firm through two offers, in two stages. Shareholders of the target firm may face a "prisoner's dilemma." If they tender at the original bid they may receive what they consider to be less than optimal price. If they hold out, however, their shares may be acquired at an even lower price, which then pressures them to accept the less than optimal first bid. By controlling two-tier offers, fair price amendments may reduce this pressure.
(4) It should be noted that capital spending is value enhancing only when it is for positive npv projects. The agency literature suggests that some managers may undertake investment even when they are not value enhancing. Thus, any increase in investment per se does not prove the absence of myopic behavior. To control for this possibility we also examined capital spending changes classified by profitability of the firms as measured by the pe ratio. In brief our analysis indicates no differences in forecasted capital spending changes between low and high pe firms.
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|Author:||Johnson, Mark S.; Rao, Ramesh P.|
|Publication:||Journal of Managerial Issues|
|Date:||Dec 22, 1997|
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