Takeover Defenses And Competition

This paper studies the interaction between takeover defenses and product market competition. The authors find that firms in more competitive industries have more takeover defenses. This is the opposite result from what one would expect if takeover defenses always constitute an inefficient outcome that increases agency costs and managerial entrenchment. A novel explanation is provided by considering the nature of the relationship between the firm and the product (or labor) market. For firms in industries where a long-term relationship with customers and employees is vital, the disruption caused by takeovers could severely negatively impact these stakeholders.