Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

  • JONATHAN M. KARPOFF
  • MICHAEL D. WITTRY

Article first published online: 10th January 2018 DOI: 10.1111/jofi.12600

Abstract


We argue and demonstrate empirically that a firm's institutional and legal context has first‐order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm‐level takeover defenses, and (iii) the legal regime as reflected by important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies related to nine different outcome variables change substantially when we include controls for these considerations.

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