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Financial Constraints, Antitakeover Protection, and Corporate Innovation: An Empirical Analysis using Antitakeover Legislation

Author

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  • Hongchao Zeng

    (Managerial Sciences Department, College of Business Administration University of Nevada Reno / MS0028, USA)

Abstract
We examine the impact of financial constraints on the relation between antitakeover protection and corporate innovation. On one hand, potential information asymmetry problems in financially constrained firms can exacerbate the entrenchment effect associated with increased antitakeover protection. On the other hand, the disciplinary role of financial constraints in the deployment of corporate resources can mitigate the entrenchment effect, allowing the shareholder interest effect to dominate. Using the passage of business combination (BC) laws to identify an exogenous variation in antitakeover protection, we find that corporate innovative activities significantly increase in the post-adoption periods for financially constrained firms incorporated in states that adopted the laws, evidence that is consistent with the mitigating effect hypothesis. Our results are robust to controlling for firm and year fixed effects, and are not subject to potential reverse causality in the passage of antitakeover laws.

Suggested Citation

  • Hongchao Zeng, 2014. "Financial Constraints, Antitakeover Protection, and Corporate Innovation: An Empirical Analysis using Antitakeover Legislation," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 1-15, August.
    • Handle: RePEc:bap:journl:140301
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial constraints; Antitakeover protection; Corporate innovation; Managerial entrenchment; Shareholder interest;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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