Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting

Abstract

This study argues that developed capital markets, through their monitoring and disciplining role, can significantly influence innovation and economic growth. Specifically, it examines how strong corporate governance proxied by the threat of hostile takeovers affects innovation. It uses a panel of 13,339 firms over the 1976-2000 period, patents and patent citations to measure the quantity and quality of innovation, and the enactment of state antitakeover laws as an exogenous decrease in the threat of hostile takeovers. It finds a decline in innovation for firms incorporated in states that pass antitakeover laws relative to firms incorporated in states that do not. Most of the impact of antitakeover laws on innovation occurs two or more years after they are enacted, indicating a causal effect. The negative effect of antitakeover laws is mitigated by the presence of alternative governance mechanisms such as large shareholders, pension fund ownership, financial leverage, and product market competition.

Keywords: Corporate Governance, Takeovers, Innovation, Financial Constraints, Managerial Myopia

JEL Classification: G31, G32, G34, G38