Management Quality and Anti-Takeover Provisions

We present the first analysis in the literature of the relationship between the quality and reputation of a firm's management and the prevalence of anti-takeover provisions in the corporate charters of IPO firms, and the influence of this relationship on post-IPO performance. We test the implications of two theories regarding the above two relationships: the "managerial entrenchment" hypothesis, which implies that anti-takeover provisions are meant mainly to enhance the control benefits enjoyed by existing firm management by minimizing the probability of takeovers by rival management teams; and the "long-term value creation" hypothesis, which argues that such provisions, while they entrench firm management, can also be value enhancing in the hands of higher quality management teams. Our empirical results can be summarized as follows. First, firms with higher quality managements are associated with a greater number of anti-takeover provisions relative to those with lower quality managements. Further, within the former category, firms with larger growth options are associated with a greater number of anti-takeover provisions. Second, when we divide our sample by management quality (higher versus lower) and then by the number of anti-takeover provisions (greater versus smaller) within each management quality category, firms with higher management quality and a greater number of anti-takeover provisions outperform firms in the remaining three categories in terms of both post-IPO operating and post-IPO stock return performance. The evidence thus rejects the managerial entrenchment hypothesis and supports the long-term value creation hypothesis.