Increase in takeover protection and firm knowledge accumulation strategy
| Published date | 01 December 2016 |
| Author | Jinyu He,Heli Wang,Shan Zhao |
| Date | 01 December 2016 |
| DOI | http://doi.org/10.1002/smj.2443 |
Strategic Management Journal
Strat. Mgmt. J.,37: 2393–2412 (2016)
Published online EarlyView 17 November2015 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2443
Received 24 October 2012;Final revision received17 August 2015
INCREASE IN TAKEOVER PROTECTION AND FIRM
KNOWLEDGE ACCUMULATION STRATEGY
HELI WANG,1*SHAN ZHAO,2and JINYU HE3
1Strategy & Organization, Lee Kong Chian School of Business, Singapore
Management University, Singapore
2Grenoble Ecole de Management, Grenoble, France
3Department of Management, Hong Kong University of Science & Technology,
Hong Kong
Research summary: We argue that the extent to which a rm faces takeover threats affects
its knowledge structure. In particular, takeover threats may lead to managers’ reluctance to
adopt a strategy towardrm-specic knowledge accumulation because implementing this strategy
requires them to acquire specialized skills, which are at risk under takeover threats. Conversely,
takeover protection leads to an increase in rm-specic knowledge. Further, the relationship
between takeover protection and rm-specic knowledge is positively moderated by managerial
ownership, which helps align managerial interestswith those of shareholders. But the relationship
is negatively moderated by managerial tenure,as long-tenured managers have already committed
to their rms. Using a differences-in-differencesmethod with Delaware antitakeover rulings in the
mid-1990s as an exogenous shock, we found results supporting these arguments.
Managerial summary: We examined how changes in the Delaware antitakeover rulings in
mid-1990s affected the knowledge structure of rms incorporated in Delaware.We reasoned that
with a greater level of takeover protection,top managers of those rms incorporated in Delaware
felt higher job security, thus providingthem stronger incentives to make strategic decisions toward
the development of rm-specic knowledge and to make correspondinghuman capital investments
in specialized skills. Empirically,rms incorporated in Delaware were found to have an increase in
the level of rm-specic knowledge in their knowledge structureafter the mid-1990s. Furthermore,
our analysis suggests that the role of takeoverprotection on top manager incentives is particularly
salient when the managers are awarded with more company shares and when the managers have
shorter organizational tenure. Copyright © 2015 John Wiley & Sons, Ltd.
INTRODUCTION
The classical agency theory considers takeover
threat as an external corporate governance mech-
anism that constrains managerial misconducts
(Jensen, 1986; Jensen and Ruback, 1983). Accord-
ing to this view, an increase in takeover threat
can enhance the disciplining power of market for
Keywords: takeover protection; rm-specic knowledge;
rm-specic human capital; top managers; exogenous
event
*Correspondence to: Heli Wang. Professor,Strategy & Organiza-
tion, Lee Kong Chian School of Business, Tel: (+65) 6828 0728.
E-mail: hlwang@smu.edu.sg
Copyright © 2015 John Wiley & Sons, Ltd.
corporate control, and thus, reduce agency costs
(Jensen, 1986; Jensen and Ruback, 1983; Rosett,
1990). Conversely, takeover protection likely leads
to greater agency cost. Empirically, some studies
have found evidence consistent with the agency
view (e.g., Bebchuk, Cohen, and Ferrell, 2009;
Bhagat and Jefferis, 1991; Gompers, Ishii, and
Metrick, 2003). For example, Gompers et al. (2003)
and Bebchuk et al. (2009) documented a negative
relation between the number of antitakeover provi-
sions that a rm has in place and the market-based
measures of rm performance.
However, the classical agency view of market
for corporate control has been challenged by
2394 H. Wang, S. Zhao, and J. He
some other scholars (e.g., Hanley, 1992; Pontiff,
Shleifer, and Weisbach, 1990; Shleifer and Sum-
mers, 1988), who argue that takeovers may lead
to breach of implicit contracts between the target
rm and its stakeholders, which can hurt the rm’s
value creation in the long run. Such breach of
implicit contracts is often evidenced by managerial
turnover, pension plan expropriation, and down-
sizing of target employees after hostile takeovers
(e.g., Brockner, 1988; Hanley, 1992; Ippolito and
James, 1992; Pontiff et al., 1990). Along these
lines, Agrawal and Knoeber (1998) found a posi-
tive relationship between the presence of takeover
threat and managerial compensation. This suggests
that managers are compensated more when there
is less assurance of their job security, indicating
the additional cost borne by rm owners when the
implicit contract with managers is lacking. Also,
a more recent study by Kacperczyk (2009) found
that takeover threat is associated with managers’
short-term orientation in decision-making. The
implicit contracts argument implies that takeover
protection may benet the rm since it helps
facilitate the establishment of implicit contracts
between the rm and its various stakeholders,
which is often critical for long-term value creation
for shareholders (Shleifer and Summers, 1988).
The existence of the two contrasting views
motivates us to dig deeper into the fundamental
mechanisms through which takeover protection
may affect rm value creation. Following the
resource-based view of the rm (Barney, 1991;
Peteraf, 1993; Wenerfelt, 1984), we maintain that
the rm’s knowledge structure is a key strate-
gic variable linking takeover protection with rm
value. Furthermore, to reconcile the different views,
we posit that boundary conditions may exist for
takeover protection to generate value for the rm.
Based on these premises, this article aims to
ll two gaps in the literature. First, we examine
the effects of takeover protection through a new
lens, that is, the knowledge structure of the rm.
Mostly conducted in the area of nance, existing
studies on takeover protection often focus on
its impact on managers themselves or rm-level
nancial outcomes, including, for example, man-
agerial ownership (Agrawal and Knoeber, 1998;
Davis, 1991), CEO dismissal (Faleye, 2007),
and rm nancial performance (Bebchuk et al.,
2009; Gompers et al., 2003). What has been rel-
atively overlooked, however, is how the inuence
of takeover on rm-manager relationship may
consequentially affect rm strategies with regard
to its critical resources such as knowledge base.
Given that a focal interest of strategic management
is rm resource positions (Barney, 1991; Peteraf,
1993; Wenerfelt, 1984) and that top managers play
important roles in accumulating and deploying
rm resources (Hambrick, 2005), it is critical
to understand how the threat of takeover, or the
absence of it, may affect top managers’ strategic
decision regarding rm resources. Only until
recently, some studies have started to look at how
takeover protection affects innovation outcomes
(e.g., Atanassov, 2013; Chemmanur and Tian,
2014; Sapra, Subramanian, and Subramanian,
2014). However, their focuses have been on
changes in the general quantity/quality of innova-
tive knowledge; and their empirical results are quite
mixed.1The current study, in contrast, examines
how takeover protection affects changes in the
structure of innovative knowledge. In particular,
building on existing studies, this article examines
how an increase in takeover protection affects
a rm’s strategic shift toward the accumulation
of rm-specic (vis-à-vis general) knowledge
resources, through its inuence on top managers’
job security and incentives.
Particularly, we argue that the accumulation
and deployment of rm-specic knowledge often
require the rm’s top managers to invest in cor-
responding specialized managerial skills. Takeover
threat increases the likelihood of a manager being
replaced, rendering his or her investment in special-
ized skills obsolete (Agrawal and Knoeber, 1998).
Therefore, when under the threat of takeover, top
managers with foresight may be unwilling to help
the rm to adopt a strategy toward the development
of a greater level of rm-specic knowledge assets.
On the contrary, if some mechanisms are in place to
mitigate this concern, managers will become more
willing to embrace a strategy based on rm-specic
knowledge assets.
Second, we take into consideration of the argu-
ments from both agency theory and implicit contract
perspectives, and provide a contingency viewon the
role of market for corporate control. While there are
still ongoing debates between these two theoretical
perspectives, little effort has been made to reconcile
1While Atanassov (2013) found that an increase in takeover
protection in negatively related to innovation, Chemmanur and
Tian (2014) found the opposite. Sapra etal. (2014), on the other
hand, found that there is a U-shaped relationship between the two.
Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 2393–2412 (2016)
DOI: 10.1002/smj
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