Skip to main content

Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis

  • Thomas J. Chemmanur and Xuan Tian

We study the effect of antitakeover provisions (ATPs) on innovation. To establish causality, we use a regression discontinuity approach that relies on locally exogenous variation generated by shareholder proposal votes. We find a positive, causal effect of ATPs on innovation. This positive effect is more pronounced in firms that are subject to a larger degree of information asymmetry and operate in more competitive product markets. The evidence suggests that ATPs help nurture innovation by insulating managers from short-term pressures arising from equity markets. Finally, the number of ATPs contributes positively to firm value for firms involved in intensive innovation activities.

Corresponding author
* Chemmanur (corresponding author),, Boston College Carroll School of Management; Tian,, Tsinghua University PBC School of Finance.
Hide All

We thank Jarrad Harford (the editor) and an anonymous referee for several valuable comments that helped to greatly improve this paper. We are grateful for comments and suggestions from Julian Atanassov, Ramin Baghai, Martijn Cremers, Jack He, Josh Lerner, Megan MacGarvie, Amit Seru, Jun Yang, seminar participants at Boston College and Indiana University, and conference participants at the 2012 American Finance Association annual meetings, the 2012 European Finance Association annual meetings, the 2011 Financial Intermediation Research Society conference, the 2011 conference on Economics of Entrepreneurship and Innovation, and the 2011 North American Econometric Society Winter Meetings. We thank Michael Flores and Fangzhou Liu for their research assistance. We remain responsible for all errors and omissions. Chemmanur acknowledges summer research support from Boston College and additional support from a Hillenbrand Distinguished Fellowship. Tian acknowledges financial support from the National Natural Science Foundation of China (Grant No. 71790591) and a Tsinghua University Research Grant (Grant No. 20151080451).

Hide All
Aghion, P.; Bloom, N.; Blundell, R.; Griffith, R.; and Howitt, P.. “Competition and Innovation: An Inverted U Relationship.” Quarterly Journal of Economics, 120 (2005), 701728.
Aghion, P.; Van Reenen, J.; and Zingales, L.. “Innovation and Institutional Ownership.” American Economics Review, 103 (2013), 277304.
Atanassov, J.Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting.” Journal of Finance, 68 (2013), 10971131.
Azoulay, P.; Graff Zivin, J.; and Manso, G.. “Incentives and Creativity: Evidence from the Academic Life Sciences.” RAND Journal of Economics, 42 (2011), 527554.
Bebchuk, L., and Cohen, A.. “The Costs of Entrenched Boards.” Journal of Financial Economics, 78 (2005), 409433.
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?Review of Financial Studies, 22 (2009), 783827.
Becker-Blease, J.Governance and Innovation.” Journal of Corporate Finance, 17 (2011), 947958.
Bradley, D.; Kim, I.; and Tian, X.. “Do Unions Affect Innovation?Management Science, 63 (2017), 22512271.
Brav, A.; Jiang, W.; Ma, S.; and Tian, X.. “How Does Hedge Fund Activism Reshape Corporate Innovation?” Journal of Financial Economics, forthcoming (2018).
Cary, W.Corporate Devices Used to Insulate Management from Attack.” Antitrust Law Journal, 39 (1969), 318324.
Chemmanur, T. J., and Jiao, Y.. “Dual Class IPOs: A Theoretical Analysis.” Journal of Banking and Finance, 36 (2012), 305319.
Chemmanur, T. J.; Loutskina, E.; and Tian, X.. “Corporate Venture Capital, Value Creation, and Innovation.” Review of Financial Studies, 27 (2014), 24342473.
Chemmanur, T. J.; Paeglis, I.; and Simonyan, K.. “Management Quality and Antitakeover Provisions.” Journal of Law and Economics, 54 (2011), 651692.
Chu, Y.; Tian, X.; and Wang, W.. “Corporate Innovation along the Supply Chain.” Management Science, forthcoming (2018).
Core, J.; Guay, W.; and Rusticus, T.. “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations.” Journal of Finance, 61 (2006), 655687.
Cornaggia, J.; Mao, Y.; Tian, X.; and Wolfe, B.. “Does Banking Competition Affect Innovation?Journal of Financial Economics, 115 (2015), 189209.
Cremers, M., and Ferrell, A.. “Thirty Years of Shareholder Rights and Firm Valuation.” Journal of Finance, 69 (2014), 11671196.
Cuñat, V.; Gine, M.; and Guadalupe, M.. “The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value.” Journal of Finance, 67 (2012), 19431977.
Ederer, F., and Manso, G.. “Is Pay-for-Performance Detrimental to Innovation?Management Science, 59 (2012), 14981513.
Fang, V.; Tian, X.; and Tice, S.. “Does Stock Liquidity Enhance or Impede Firm Innovation?Journal of Finance, 69 (2014), 20852125.
Ferreira, D.; Manso, G.; and Silva, A.. “Incentives to Innovate and the Decision To Go Public or Private.” Review of Financial Studies, 27 (2014), 256300.
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107155.
Griliches, Z.; Hall, B.; and Pakes, A.. “The Value of Patents as Indicators of Inventive Activity.” In Economic Policy and Technological Performance, Dasgupta, P. and Stoneman, P., eds. Cambridge, UK: Cambridge University Press (1987).
Grossman, S., and Hart, O.. “One Share–One Vote and the Market for Corporate Control.” Journal of Financial Economics, 20 (1988), 175202.
Gu, Y.; Mao, C.; and Tian, X.. “Bank Interventions and Firm Innovation: Evidence from Debt Covenant Violations.” Journal of Financial Economics, forthcoming (2018).
Hall, B. H.; Griliches, Z.; and Hausman, J.. “Patents and R and D: Is There a Lag?International Economic Review, 27 (1986), 265283.
Hall, B.; Jaffe, A.; and Trajtenberg, M.. “The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools.” Working Paper, National Bureau of Economic Research (2001).
Hall, B.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 36 (2005), 1638.
Harris, M., and Raviv, A.. “Corporate Governance: Voting Rights and Majority Rules.” Journal of Financial Economics, 20 (1988), 203235.
Harris, M., and Raviv, A.. “The Design of Securities.” Journal of Financial Economics, 24 (1989), 255287.
Hausman, J.; Hall, B. H.; and Griliches, Z.. “Econometric Models for Count Data with an Application to the Patents-R & D Relationship.” Econometrica, 52 (1984), 909938.
He, J., and Tian, X.. “The Dark Side of Analyst Coverage: The Case of Innovation.” Journal of Financial Economics, 109 (2013), 856878.
He, J., and Tian, X.. “Finance and Corporate Innovation: A Survey.” Working Paper, University of Georgia (2017).
Hirshleifer, D.; Low, A.; and Teoh, S.. “Are Overconfident CEOs Better Innovators?Journal of Finance, 67 (2012), 14571498.
Holmstrom, B.Agency Costs and Innovation.” Journal of Economic Behavior and Organization, 12 (1989), 305327.
Hsu, P.; Tian, X.; and Xu, Y.. “Financial Market Development and Innovation: Cross-Country Evidence.” Journal of Financial Economics, 112 (2014), 116135.
Imbens, G., and Kalyanaraman, K.. “Optimal Bandwidth Choice for the Regression Discontinuity Estimator.” Review of Economic Studies, 79 (2012), 933959.
Johnson, W.; Karpoff, J.; and Yi, S.. “The Bonding Hypothesis of Takeover Defenses: Evidence from IPO Firms.” Journal of Financial Economics, 117 (2015), 307332.
Kaplan, S., and Zingales, L.. “Do Financial Constraints Explain Why Investment Is Correlated with Cash Flow?Quarterly Journal of Economics, 112 (1997), 169215.
Karpoff, J., and Wittry, M.. “Test Identification with Legal Changes: The Case of State Antitakeover Laws.” Working Paper, University of Washington (2015).
Lee, D. S.Randomized Experiments from Non-Random Selection in U.S. House Elections.” Journal of Econometrics, 142 (2008), 675697.
Lee, D., and Lemieux, T.. “Regression Discontinuity Designs in Economics.” Journal of Economic Literature, 48 (2010), 281355.
Lerner, J.; Sorensen, M.; and Stromberg, P.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445477.
Lerner, J., and Wulf, J.. “Innovation and Incentives: Evidence from Corporate R&D.” Review of Economics and Statistics, 89 (2007), 634644.
Manso, G.Motivating Innovation.” Journal of Finance, 66 (2011), 18231860.
McCrary, J.Manipulation of the Running Variable in the Regression Discontinuity Design: A Density Test.” Journal of Econometrics, 142 (2008), 698714.
Nanda, R., and Rhodes-Kropf, M.. “Investment Cycles and Startup Innovation.” Journal of Financial Economics, 110 (2013), 403418.
Porter, M.Capital Disadvantage: America’s Failing Capital Investment System.” Harvard Business Review, 70 (1992), 6582.
Sapra, H.; Subramanian, A.; and Subramanian, K.. “Corporate Governance and Innovation: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 49 (2014), 9531007.
Seru, A.Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity.” Journal of Financial Economics, 111 (2014), 381405.
Shleifer, A., and Summers, L. H.. “Breach of Trust in Hostile Takeovers.” In Corporate Takeovers: Causes and Consequences, Auerbach, A. J., ed. Chicago, IL: University of Chicago Press (1988).
Stein, J.Takeover Threats and Managerial Myopia.” Journal of Political Economy, 96 (1988), 6180.
Tian, X., and Wang, T.. “Tolerance for Failure and Corporation Innovation.” Review of Financial Studies, 27 (2014), 211255.
Williamson, O.Markets and Hierarchies.” In Analysis and Antitrust Implications: A Study in the Economics of Internal Organization, New York, NY: Free Press (1975).
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 24 *
Loading metrics...

Abstract views

Total abstract views: 88 *
Loading metrics...

* Views captured on Cambridge Core between 11th April 2018 - 22nd April 2018. This data will be updated every 24 hours.