Takeover Protections and Stock Returns

Abstract

We argue that takeover protections increase equity risk and stock returns by removing a valuable put option to sell equity when firms approach financial distress. We investigate these claims empirically by looking at the risk and return dynamics of distressed firms around the enactment of anti-takeover laws, both domestically and internationally. In line with our predictions, we find that distressed firms experience a significant increase in returns and market betas after the passage of anti-takeover laws. We find no such effects in the full sample of firms.