Takeover Defenses and Earnings Informativeness

This paper investigates whether the firm-level takeover defenses reduce earnings informativeness. The takeover defenses create a greater agency risk attributable to the lack of market for corporate control. Using a large sample of U.S. firms during the period 1990 to 2006, I find evidence that firms with more antitakeover provisions exhibit lower value relevance of earnings. I recognize several important valuation issues that may make it difficult to draw clear inferences from the results. First, I address a nonlinear value implication of earnings by showing that the impact of corporate governance is not symmetric in profits and losses. Investors seem to value profits at a discount and penalize losses more in firms with more takeover defenses. Second, I consider a potential endogeneity problem of corporate governance. By performing two-stage conditional regressions, I find the results are robust to concerns about endogeneity. Finally, I also attempt to rule out the possibility of market mispricing of earnings across corporate governance practices by conducting Mishkin (1983) tests. Taken as a whole, the results of this paper support the agency risk explanation of takeover defenses that antitakeover provisions are more likely to cause managerial entrenchment and decrease firm value.