We examine the consequences of a damaged reputation for fraud firms in the context of product markets. We generate three direct measures of reputational damage and find evidence that customers impose significant reputational sanctions on fraud firms. Using yearly transactional data to track the business dealings of fraud firms with large customers, we show that customer reputational sanctions result in a decline in the firm's operating performance through increased selling costs, as suggested by previous studies of corporate reputation. We further find that reputational losses estimated from an event study approach reflect the actual decrease in the revenue of a fraud firm, which suggests that the event study approach yields a reliable measure of reputational losses. Finally, we document that these findings are the result of a damaged reputation following the detection of fraud rather than an effect of adverse information revealed upon fraud detection.

We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm׳s commitments by reducing the likelihood that an outside takeover will change the firm׳s operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm׳s use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses creates positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.

We document that the relation between firm value and the use of takeover defenses is positive for young firms but becomes negative as firms age. This value reversal pattern reflects specific changes in the costs and benefits of takeover defenses as firms age and arises because defenses are sticky and rarely removed. Firms can attenuate the value reversal by removing defenses, but do so only when the defenses become very costly and adjustment costs are low. The value reversal explains previous mixed evidence about takeover defenses and implies that firm age proxies for takeover defenses’ heterogeneous impacts on firm value.