The Missing Link in the Corporate Takeover Literature

The flourishing corporate takeover literature extensively discusses the pros and cons of takeover defenses, but falls short of explaining the wide divergence in actual antitakeover practices. As recent empirical studies reveal, some IPO stage firms do not adopt any defenses, while many others employ a variety of defenses (Daines & Klausner 2000, Coates 2000 and Field & Karpoff 2000). This paper explains that even similar firms may rationally diverge in their antitakeover practices. In a sense, antitakeover choices resemble the way drivers cope with rush hour traffic. There is no one optimal solution that all drivers could adopt since the tactics that drivers employ naturally interact. Hypothetically, if everyone selected the same route to drive into town, alternative routes would remain entirely clear at prime time, making them much more attractive. Hence, drivers self select various tactics, and their diversified behavior is rational even if their preferences are similar. And like drivers like firms. In a population that is loaded with firms that adopt takeover defenses, similar unshielded firms receive more attention from potential buyers since they are relatively easier to acquire. Thus, the more firms adopt defenses, the more tempting it becomes for other firms to remain unshielded. The counter effects among firms that adopt defenses, and those that abjure them, along with the possible outcomes of this interaction, are the essence of this paper.