The Impact of Ownership Structure on Antitakeover Provisions and Debt Costs

Antitakeover provisions (ATPs) have long been a subject of debate in corporate governance, with their effects on shareholder wealth and equity costs extensively studied. Recent research has expanded to examine ATP implications for various stakeholders, including creditors, suppliers, and customers. Our new working paper contributes to this ongoing discussion by exploring how ownership structure, particularly family ownership, influences the valuation consequences of ATPs from debtholders’ perspectives.

Ownership structure significantly affects the agency cost of debt by influencing managerial agency conflicts and shareholder-debtholder conflicts. Large shareholders, especially in family-owned firms, have strong incentives to influence managers and potentially transfer resources from debtholders to themselves. This dynamic creates varying implications for different types of large shareholders.

The removal of ATPs can impact a firm’s cost of debt in opposing ways. On one hand, it increases vulnerability to takeovers, raising concerns about leverage and default risk. Without ATPs, firms become more susceptible to hostile takeovers, which can lead to increased leverage as acquirers often use debt to finance these transactions. This heightened vulnerability may result in post-acquisition restructuring that prioritizes shareholder returns over debt obligations. On the other hand, removing ATPs exposes firms to market discipline, potentially reducing incentives to expropriate debtholders. By eliminating ATPs, management becomes more accountable to market forces, making them more sensitive to market perceptions and encouraging better governance. The threat of takeovers can motivate management to avoid actions that might harm creditors.

Our research reveals that the net effect of ATP removal on debt costs differs between family and nonfamily firms through two key mechanisms. Following previous studies, we define family firms as those in which founding family members, either individually or as a group, have equity ownership exceeding 5% or in which at least one founding family member sits on the board or holds a top management position. First, takeover vulnerability and conflicts between debtholders and shareholders play a significant role. In family firms, concentrated ownership and intergenerational control incentives may act as a substitute for ATPs, deterring unwanted bids. This suggests that banks may be less concerned about increased takeover vulnerability when ATPs are removed from family firms compared to nonfamily firms, where such vulnerability is a more pressing issue. Second, the impact of ATP removal depends on which type of agency conflicts it mitigates more significantly. In family firms, conflicts between controlling and minority shareholders are pronounced, while nonfamily firms tend to face more severe conflicts between shareholders and managers.

Our empirical analysis of S&P 1500 index firms from 2004 to 2015 reveals intriguing differences between family and nonfamily firms regarding responses to debt costs following the removal of ATPs. Family firms experience reduced costs of debt when proposals to remove ATPs pass by a narrow margin. In contrast, nonfamily firms encounter higher debt costs in similar scenarios. This disparity highlights the importance of the firm’s risk-shifting incentives and external governance structure as crucial factors in this dynamic.

Among family firms, the loan-spread-reducing effects of passed governance proposals are most pronounced in subgroups with lower risk-shifting concerns. These include firms with lower dividend payments, lower capital expenditure to total assets ratios, lower R&D intensity, lower stock return volatility, lower leverage, and higher modified Altman Z-scores. In contrast, nonfamily firms exhibit loan-spread-increasing effects of weak takeover defenses, particularly in subgroups with higher levels of asset substitution problems, such as higher cash dividends, higher capital expenditure to total assets ratios, higher stock return volatility, and higher leverage.

Institutional ownership also plays a significant role in this relationship. Nonfamily firms with higher institutional ownership among their top ten shareholders experience a marked increase in loan spreads following the passage of shareholder proposals to remove ATPs. In contrast, family firms benefit from reduced loan spreads regardless of top institutional shareholders’ ownership levels; however, the decrease in loan spreads is more substantial among those with lower institutional ownership. These results suggest that removing ATPs in family firms is perceived as a positive governance signal that does not threaten creditor interests. Conversely, in nonfamily firms with high institutional ownership, removing ATPs may be viewed as potentially diminishing creditor influence over financial decisions. Overall, these findings underscore the complex interplay between ownership structure, corporate governance mechanisms, and debt financing costs.

Our research enhances our understanding of corporate governance mechanisms and their broader implications for firm value. By incorporating the complexities of ownership structures, we provide valuable insights for investors and creditors on how governance mechanisms can influence financing costs differently based on ownership type.

This study contributes to resolving the longstanding takeover defense puzzle by highlighting the importance of considering ownership structure when evaluating the effects of ATPs on debt costs. It challenges previous findings that suggested firms with more ATPs generally experience lower costs of debt, demonstrating that this relationship is more nuanced when accounting for family versus nonfamily ownership.

In conclusion, our findings underscore the need for a more nuanced approach to corporate governance research and practice, taking into account the diverse ownership structures in the corporate landscape. This research provides a deeper understanding of how ATPs interact with ownership structures to influence debt costs, offering valuable insights for both academics and practitioners in the field of corporate finance and governance.

The authors’ paper can be found here.

Jun-Koo Kang is a Canon Professor/Distinguished Professor of Finance at Nanyang Business School, Nanyang Technological University, Singapore.

Yuzi Chen is a Lecturer at the School of Finance, Central University of Finance and Economics, China. 

Jungmin Kim is an Associate Professor of Finance at the School of Accounting and Finance at The Hong Kong Polytechnic University, Hong Kong.

Hyun Seung Na is a Professor of Finance and the Associate Dean for Academic Affairs at Korea University Business School, Korea.