Protective governance structure is often viewed as costly to minority shareholders who bear the costs of opportunism by entrenched managers. A less common view is that protective governance encourages value-enhancing initiative, allowing risk-averse managers to pursue projects they would otherwise forgo. To assess these views we examine the acquisition decisions of S&P 500 firms between 1994 and 2005 and document two entrenching dimensions of governance: founding family presence and larger boards with more inside directors. We find that family firms destroy value when they acquire, consistent with an agency cost explanation for acquisitions. In contrast, firms with large boards and more insiders are more likely to acquire and to create value when they do acquire. These results are consistent with benefits to managerial initiative when managers are insulated from discipline. Finally, we find no systematic evidence that shareholder right limiting provisions either facilitate managerial entrenchment or lead to wealth losses through acquisition activity.

Contrary to past literature, ownership defined as “all officers and directors” of the target firm has no association with target returns. Rather, we find that inside (managerial) ownership has a positive relation with target returns, whereas active-outside (non-managing director) ownership has a negative relation with target returns. Using accounting-based versus market-based performance measures, we find that the relation between inside ownership and target returns is best explained by takeover anticipation. Using bidder and synergy returns we find that the relation between outside ownership and target returns is best explained by outsiders' willingness to share gains with the bidder. While the relations are more pronounced for non-tender deals, they also hold for tender offers when active-outside ownership is corporate rather than institutional.