Takeover Defenses and Competition: The Role of Stakeholders


  • An earlier version of this article was entitled “Weak Shareholder Rights: A Product Market Rational.” We thank Judy Chevalier, Theodore Eisenberg (the editor), Yaniv Grinstein, Wei Jiang, Gideon Saar, Matthew Spiegel, and an anonymous referee, as well as seminar participants at the 2007 Conference on Empirical Legal Studies at NYU, Arizona State, Chicago GSB, Cornell, Duke, Harvard Law School, Indiana, Illinois, INSEAD, Michigan State, Northwestern, NYU-Stern, Pittsburgh, Rutgers, UNC, Tilburg, and Yale for their comments. Dasol Kim and Zhenxu Tong provided excellent research assistance. All errors are our own.

*K. J. Martijn Cremers, International Center of Finance, Yale School of Management, 135 Prospect St., New Haven, CT 06520; email: martijn.cremers@yale.edu. Nair is from Old Lane, LP; Peyer is from INSEAD.


This article studies the interaction between takeover defenses and competition. We find that firms in more competitive industries have more takeover defenses. This suggests that product market competition can be a substitute for the market for corporate control, with more information available in competitive markets making monitoring less costly. A novel instrument for the incentives of stakeholders in the product market to monitor is provided by the nature of the relationship between the firm and its customers. For firms in industries with long-term relationships with customers and suppliers, these stakeholders have greater incentives to monitor. We document that stronger competition is linked to more defenses only in these “relationship” industries. Finally, we discuss the implications for the design of other governance mechanisms.