In this study, we are the first to reevaluate causally the effects of antitakeover provisions (ATPs) on the likelihood and quality of investment in mergers and acquisitions (M&A). We do so by exploiting instrumental variables to circumvent evidential endogeneity in ATPs. Our causal analysis is new to reveal that higher levels of ATPs are associated with lower propensity for investment in M&A and, after accounting for unobservable factors that affected the decision to invest in M&A, with investment that is more likely to be both value enhancing to shareholders and personally riskier to managers. Our findings support theory and evidence in other corporate contexts that gives weight to the possibility that ATPs curb risk related agency conflict. Our collective findings of a (positive) surprise also provide substantiation for known information about ATPs having value relevance for market perception of the quality of investment in M&A.

This article uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial “playing it safe” behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q, segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.

We find that corporate governance characteristics of acquiring firms (board ownership, board size, and block-holder control) have an economically and statistically significant impact on operating performance changes following mergers. We also show that dispersion of intra-board ownership stakes is an important but heretofore overlooked factor when judging the influence of ownership on the outcomes of corporate choices. Finally, we present evidence that suggests the market sometimes under- or overreacts to merger news when initially revaluing merger partners but corrects any miscalculation following the consummation of the merger.