Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage

Authors

  • Gerald T. Garvey,

    1. Commerce and Business Administration, University of British Columbia
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  • Gordon Hanka

    1. Smeal College of Business Administration, Pennsylvania State University
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    • Garvey is from the Faculty of Commerce and Business Administration, University of British Columbia. Hanka is from the Smeal College of Business Administration, Pennsylvania State University. Thanks to Ron Giammarino for suggesting the use of second-generation antitakeover laws and to Jon Karpoff for providing data on such laws. For comments and suggestions we thank Luigi Zingales, Rajesh Aggarwal, Bob Gregory, Peter Hartley, Rob Heinkel, Joseph Hirshberg, Burton Hollifield, Walter Novaes, Rohan Pitchford, Laura Field, Harold Mulherin, Chris Muscarella, Ed Rice, Paul Malatesta, and the participants of the Penn State and University of Washington Finance workshops, the Utah Winter Finance Conference, and the American Finance Association conference.

Abstract

We find that firms protected by “second generation” state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.

Ancillary