TY - JOUR
T1 - Supermajority provisions and shareholders wealth
T2 - Evidence from South Korea's natural experiment
AU - Kim, Hyeong Joon
AU - Han, Seung Hun
N1 - Publisher Copyright:
© 2021 John Wiley & Sons Ltd.
PY - 2022/5
Y1 - 2022/5
N2 - Research Question/Issue: The existing research continues to debate whether firms' anti-takeover provisions enhance or harm shareholders' wealth. In this study, we examine the causal relation between the supermajority provision and shareholders' wealth by employing a quasi-natural experiment: the two court rulings that weaken the anti-takeover force of the supermajority provision in Korea, where the supermajority provision is the most widely used anti-takeover provision. Research Findings/Insights: Using market reactions around the two court rulings, we find that firms with a supermajority provision as their only anti-takeover provision significantly underperform on average, compared with firms with no provision. This finding is robust to various empirical approaches that aim to address potential endogeneity concerns. We also find evidence that the supermajority provision plays a more significant role for firms with long-term investments, higher complexity, or higher takeover threats. Furthermore, the second among the two court rulings appears to have a stronger impact on the firm value and institutional investors' selling compared with the first one, suggesting the reinforcing effect of similar court decisions. Theoretical/Academic Implications: Our study contributes to the corporate governance literature by investigating the effect of the supermajority provisions on shareholders' wealth. While conventional wisdom holds that the anti-takeover provisions harm shareholders' rights and wealth, our evidence from the quasi-natural experiment in Korea suggests that the positive effect of the supermajority provision empirically dominates the negative effect. Overall, our study supports the value-enhancing perspective on the supermajority provision, indicating that the Korean stock market views such a provision as inducing higher shareholders' wealth. Practitioner/Policy Implications: This study highlights that a more contextual view of the relation between the anti-takeover provisions and shareholders' wealth is necessary. Moreover, we suggest that a regulation prohibiting firms' anti-takeover provisions might harm shareholders' wealth, but it appears that a firm-specific approach should be considered.
AB - Research Question/Issue: The existing research continues to debate whether firms' anti-takeover provisions enhance or harm shareholders' wealth. In this study, we examine the causal relation between the supermajority provision and shareholders' wealth by employing a quasi-natural experiment: the two court rulings that weaken the anti-takeover force of the supermajority provision in Korea, where the supermajority provision is the most widely used anti-takeover provision. Research Findings/Insights: Using market reactions around the two court rulings, we find that firms with a supermajority provision as their only anti-takeover provision significantly underperform on average, compared with firms with no provision. This finding is robust to various empirical approaches that aim to address potential endogeneity concerns. We also find evidence that the supermajority provision plays a more significant role for firms with long-term investments, higher complexity, or higher takeover threats. Furthermore, the second among the two court rulings appears to have a stronger impact on the firm value and institutional investors' selling compared with the first one, suggesting the reinforcing effect of similar court decisions. Theoretical/Academic Implications: Our study contributes to the corporate governance literature by investigating the effect of the supermajority provisions on shareholders' wealth. While conventional wisdom holds that the anti-takeover provisions harm shareholders' rights and wealth, our evidence from the quasi-natural experiment in Korea suggests that the positive effect of the supermajority provision empirically dominates the negative effect. Overall, our study supports the value-enhancing perspective on the supermajority provision, indicating that the Korean stock market views such a provision as inducing higher shareholders' wealth. Practitioner/Policy Implications: This study highlights that a more contextual view of the relation between the anti-takeover provisions and shareholders' wealth is necessary. Moreover, we suggest that a regulation prohibiting firms' anti-takeover provisions might harm shareholders' wealth, but it appears that a firm-specific approach should be considered.
KW - anti-takeover provisions
KW - corporate governance
KW - firm value
KW - quasi-natural experiment
KW - shareholders' wealth
UR - http://www.scopus.com/inward/record.url?scp=85115872393&partnerID=8YFLogxK
U2 - 10.1111/corg.12402
DO - 10.1111/corg.12402
M3 - Article
AN - SCOPUS:85115872393
SN - 0964-8410
VL - 30
SP - 311
EP - 334
JO - Corporate Governance: An International Review
JF - Corporate Governance: An International Review
IS - 3
ER -