New Vanderbilt-led research into corporate anti-takeover provisions—measures used to prevent unwanted acquisitions—refutes accepted perspectives about their use and suggests that ATPs can play an important role in protecting innovation and valuing employees’ contributions.
“While most of the research on ATPs suggest they reduce firm value by entrenching managers, we were curious to understand why managers strengthen anti-takeover when firms experience an unexpected threat of being acquired and whether this would have a positive impact on human capital,” said Joshua White, one of the lead researchers.
The researchers examined ATPs adopted in response to the staged implementation of the Inevitable Disclosure Doctrine by U.S. state courts between 1990 and 2013. The IDD protects firms’ trade secrets by preventing employees from working for rivals if the employee could unavoidably divulge those secrets. “The IDD significantly reduces employee mobility and therefore increases the probability of competitors acquiring the firm for its intellectual capital,” explained White, assistant professor of finance at Vanderbilt Owen Graduate School of Management. “Together, reduced mobility and increased takeover risk can harm employee incentives to make firm-specific investments since greater effort might not result in promotions or higher future wages.”
Ultimately, the researchers found that managers of firms based in states that adopted IDD were more likely to implement ATPs that protected the firm and its employees from hostile takeovers—especially those firms where human capital and employee relations are key to value creation.
Why It Matters:
Traditional views of ATPs suggest that they can negatively impact employee-management relations by entrenching poor leaders within the firm and reducing employee innovation. The new findings by White and co-author Aiyesha Dey, associate professor of business of administration at Harvard Business School, reject these notions. Instead, they suggest that companies, particularly those based in states with IDD, can actually demonstrate support for their employees by adopting ATPs. “Our findings show that ATPs can be used to credibly commit to employees in order to protect long-term value creation,” wrote White and Dey.
The researchers also say their findings demonstrate the importance of consistently examining corporate policies in relation to changing laws and regulations. “With an ever-changing workforce, governance policies and their impact on employee relations must be constantly evaluated,” White said. “As shown by this study, the traditional view of ATPs, as beneficial to management and detrimental to employees, turned out not to be true.”
White and Dey are eager to share their findings with academics, policymakers and corporate leaders and to engage in further discussion about the intersection of state and national laws or regulations and corporate governance. “There are often assumptions made by employees about the motivations behind corporate provisions,” White said. “We hope that our study can prompt further discussion to elevate employer-employee relations.”
This research was supported by Vanderbilt University’s Hans Stoll Financial Markets Research Center and Harvard Business School.
The paper, “Labor Mobility and Antitakover Provisions,” was published in the January 2021 edition of the Journal of Accounting and Economics.