How Target Shareholders Benefit from Value-Reducing Defensive Strategies in Takeovers




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    • Both authors are from the Business School, University of Michigan. They would like to thank M. Bagnoli, S. Bhattacharaya, M. Bradley, H. DeAngelo, E. Han Kim, G. Kaul, G. Niehaus, M. P. Narayanan, J. Stiglitz, and the discussant, M. Fishman, at the Western Finance Meetings in Napa, the editor, R. Stulz, and two anonymous referees for their many helpful comments. The usual disclaimer applies. They also acknowledge partial financial support of the Michigan Business School.


This paper shows that target shareholders can be made better off through the use of certain types of defensive strategies that reduce the value of the target by different amounts for different bidders. In many cases, simply the threat of such strategies can make target shareholders better off. Therefore, empirical tests based on stock price reactions at the adoption of defensive strategies may be underestimating the effect of such strategies. The paper also identifies the necessary characteristics that make these strategies effective and shows that many observed defenses possess similar properties.