With Greater Power Comes Greater Responsibility? Antitakeover Protection and Stakeholder Welfare

Abstract

Using the passage of an antitakeover law as an indicator of managerial power, this paper examines how the shift in power from shareholders to managers affects the welfare of non-shareholding stakeholders. Two competing hypotheses are entertained. The shareholder perspective predicts that the passage of antitakeover protection will lead to a decrease in welfare of shareholders and stakeholders alike, as managers divert corporate resources to pursue private interests. The stakeholder perspective, in contrast, predicts that the passage of antitakeover protection will increase stakeholder welfare. Because stakeholder investments benefit the firm in the long run, managers will be more likely to attend to stakeholders when relieved from short-termism. Using a sample of 878 U.S. firms from 1991 to 2002, the paper finds that antitakeover protection leads to an increase in community welfare through greater charitable contributions and environmental protection, but has no impact on employee or customer welfare. Additional analysis shows that firms whose CEOs increase their attention to stakeholders following the passage of antitakeover law, have higher market value in the long run. This provides additional evidence that the relief from short-termism, rather than managerial self-dealing, underlines the increase in stakeholder welfare.

Keywords: corporate governance, stakeholder management, short-termism, agency theory