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The Institutional Context of Hostile Takeover Activity

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The Institutional Context of Hostile Takeover Activity Powered By Docstoc
					STAKEHOLDER RIGHTS AND
CORPORATE GOVERNANCE:
A Cross-National Study of Hostile Takeovers

           William D. Schneper
            Mauro F. Guillén

           The Wharton School
       and Department of Sociology
        University of Pennsylvania
       Overall Research Agenda
• The study of “management-in-society.”
• Comparative, cross-national lens.
• Specifically:
   – Managerial prerogatives (i.e. authority).
   – What makes management legitimate?
       • In free societies.
       • In authoritarian societies.
   – Changes in management & organization as a result of
     industrialization & globalization.
   – Role of the firm in society (profits or more?).
   – Roles of different types of managers: founders, heirs, professional
     executives.
  Research Agenda on Globalization
• Literature Review.
• Diffusion of ISO 9000.
• Diffusion of Internet use:
   – Entrepreneurship & public policy.
   – Political & sociological drivers.
• Diffusion of “neo-liberalism”: central bank
  independence (a form of technocracy).
• Diffusion of venture capital financing.
• Diffusion of modernist architecture (management,
  organization & aesthetics).
• Corporate Governance:
   – Trends.
   – Hostile takeovers.
       Corporate Governance
• A contested issue.
• Who should participate in it?
• How are the risks and rewards to be
  allocated?
• Which methods of transferring corporate
  ownership and control are legitimate?
         Previous Research
      on Corporate Governance
• Descriptive, qualitative and categorical:
  – Shareholder versus stakeholder models.
  – Bank-centered versus market-mediated.
  – Internal versus external constraints:
     • Internal constraints: Boards of directors with broad stakeholder
       representation; high levels of ownership concentration (large
       shareholders as monitors).
     • External constraints: High ownership dispersion, liquid stock
       markets, and active hostile takeover markets.
• Little empirical research on the reasons for
  cross-national differences.
  Competing Models of the Firm
• The firm is merely a bundle of assets, or
  resources, whose true value is to be assessed by
  the cash flows that it provides to its shareholders.
• The firm is an integral component of the social
  fabric and is characterized by the intersecting
  interests of various stakeholders, including not
  only shareholders and managers but also
  employees, suppliers, creditors, and the
  surrounding community.
The Shareholder-Centered View
• “Public companies are not in the business to
  reward creditors, inspire devotion of their
  employees, win the favor of the communities in
  which they operate, or have the best products.
  These are all means to an end—making
  shareholders richer” (Seely 1996:35-36).

• “Takeovers…represent one of Nature’s methods of
  eliminating deadwood in the struggle for survival.
  A more open and more efficiently responsive
  corporate society can result” (Samuelson
  1970:505).
             Hostile Takeovers
• Praised by some; bedeviled by others:
   – An effective way to discipline managers, and improve
     efficiency.
   – Worst manifestation of footloose capitalism: “corporate
     raiders,” “corporate predators,” etc. (Hirsch 1986).
• Not clear they deliver better corporate governance
  outcomes or greater allocative efficiency (Jarrell
  et al. 1988; Gedaljlovic & Shapiro 1998) .
• Cross-national differences (1988-98):
   – 431 hostile takeover attempts in the United States.
   – 220 in Britain.
   – 20 in France, 12 in Sweden, 5 in Germany & Spain, 3
     in Malaysia, 2 in Thailand, and just 1 each in Chile and
     Japan.
Limitations of Previous Research on
         Hostile Takeovers
• Mostly about the U.S.
• No attempt to explain why the frequency of
  the practice differs from country to country.
• No cross-national empirical studies.
 Five-Step Theoretical Approach
• Observation: Modern business corporation
  beset by perennial conflicts.
• Relevant stakeholders:
  – Shareholders, workers, and banks.
• Defining their interests as far as hostile
  takeovers are concerned.
• Power enables stakeholders to realize their
  interests.
• Cross-national differences in the power of
  stakeholders.
                 Defining Power
• We “use the vocabulary of power in the context of social
  relationships [among shareholders, workers and banks, for
  instance] to speak of human agents, separately or together,
  in groups or organizations, through action or inaction,
  significantly affecting the thoughts or actions of others
  (specifically, in a manner contrary to their interests)” (Lukes
  1974:54).
• Why is this definition appropriate?
   – Takes into account overt and covert conflict among stakeholders.
   – Stakeholders can exercise their power not just by behaving in a
     specific way but also by not acting, so long as other stakeholders
     accept their definition of the situation.
   – The implicit threat of a hostile takeover can be as behaviorally
     relevant as its actual occurrence. Hence, analyzing the reasons why
     hostile takeovers are launched is as theoretically and empirically
     relevant as studying why, once launched, they are completed (Davis
     and Stout 1992).
Defining Cross-National Differences
    in the Distribution of Power
• Weber (1978:926) once noted, “the
  structure of every legal order directly
  influences the distribution of power,
  economic or otherwise, within its respective
  community.”
• “A system of rules is also a system of
  power” (Fligstein 2001:36).
              (1) Stakeholders
• H1 (+) Shareholders:
  – Hostile takeovers offer shareholders the opportunity to
    sell to the highest bidder.
  – Shareholders’ interests better protected when legislation
    protects them against the discretion of the incumbent
    management team.
  – Measure: Time-varying shareholder rights index,
    counting: (1) proxy by mail; (2) absence of requirement
    to deposit shares before attending the general meeting;
    (3) oppressed minority provisions; (4) cumulative
    voting; (5) preemptive rights to new issues; and (6) a
    minimum capital of 10 percent or less in order to call a
    special shareholders’ meeting.
              (1) Stakeholders
• H2 (-) Workers.
  – Labor values job security & solidarity over efficiency &
    profitability (Hirsch 1986; Aguilera & Jackson 2003).
  – Hostile takeovers seen as a breach of contract between
    management and labor (Shleifer and Summers 1988).
    Evidence indicates takeovers result in layoffs, and hostile
    takeovers result in more layoffs than friendly ones.
  – When labor has channels to assert its interests, these
    threats are diminished.
  – Measure: Ratification of fundamental ILO labor
    standards: collective bargaining; freedom of association;
    right to organize and bargain collectively; protection of
    wages; and security of employment.
              (1) Stakeholders
• H3 (-) Banks:
  – Voting power enables them to act as key insider (hostile
    takeovers are unnecessary).
  – Interested in participating in control of important
    commercial customers.
  – Reputation costs could outweigh tangible financial
    gains.
  – Measure: Sum of four-point scales on the ability of
    banks to own stock in non-financial firms.
               (2) The Context
• Macroeconomic uncertainty:
   – Uncertainty undermines stability and effectiveness of
     markets.
   – Measure: Log of the conditional variance of nominal
     GDP growth in a given year fitted with a generalized
     conditional heteroskedasticity (GARCH) specification .
• Individual freedoms:
   – Predictable rules of the game, safeguards against
     government intervention, and ability to exercise
     contractual freedom.
   – Measure: Polity IV’s democracy score: free speech,
     checks & balances, and civil liberties.
                   Data
• Unit of analysis: country-year (N=363).
• 37 countries.
• 10 years (1989-1998).
• A total of 950 hostile takeovers
  announcements.
• Source: SDC Platinum.
                     Control Variables
Serial correlation           +    Lagged dependent variable
                                  or country fixed effects
Country size                 +    Size of labor force
Potential targets           +/-   Number of listed firms
                                  (linear and squared)
Market liquidity             ?    Turnover ratio
Market performance           -    Total stock market return
Business cycle               +    GDP growth rate
                             -    Real interest rate
Economic development         +    GDP per capita
Overall takeover market      +    # non-hostile takeovers
Annual effects               ?    Annual dummies
Foreign influences           +    % with a foreign acquirer
                      Method
• Dependent variable (count of hostile
  takeovers announcements):
  – nonnegative.
  – integer-valued.
  – overdispersed.
• Negative binomial (no equal mean &
  variance).
• Panel data (country-years):
  – Generalized estimating equations (GEE)
    method.
  – Fixed effects.
• Interpretation of coefficients: 100×(eb-1).
TABLE 1
Sample Descriptive Statistics and Correlations (N = 362 country-years, 38 countries, 1989-1998)

                                          Mean         SD      1       2       3     4       5       6       7       8      9      10     11   12    13   14
1. # of hostile takeovers                  2.22       7.61
2. Shareholder rights                      3.04       1.32     .29*
3. Worker rights                           5.28       1.69    -.34*   -.40*
4. Citizen rights                          4.32        .99     -.09   -.19*    .54*
5. Banking restrictions                    2.12        .87      .07     .00   -.26* -.17*
6. Stock market age                     118.38       72.72     .26*    -.05    .28* .38*    -.14*
7. Stock market age squared             19285.81   25500.34    .19*    -.12    .21* .26*    -.22*    .93*
8. Macroeconomic uncertainty              -7.41       1.00     -.12    .18*   -.20* -.24*     .13   -.21*   -.16*
9. Individual freedoms                     7.98       5.79      .10    -.08    .15* .43*     -.12    .23*    .17*    -.12
10. Lagged # of hostile takeovers          2.45       8.93     .84*    .28*   -.35* -.09      .07    .26*    .19*    -.12    .09
11. Size of the labor force (million)     29.82      66.25     .17*    .37*   -.38* -.31*     .09     .05    -.01     .02   -.01   .17*
12. Number of listed companies             730      1410.72    .69*    .43*   -.52* -.25*    .14*    .22*     .13    -.12    .09   .69*    .66*
13. GDP growth rate                        3.55       3.40     -.07    -.11   -.32* -.26*    -.05   -.21*   -.14*    .20*   -.12   -.06     .07 -.01
14. GDP per capita (U.S. $)             16928.79   13139.18    .14*   -.18*    .20* .54*     -.05    .30*    .24*   -.39*   .33*   .14*   -.21* .08 -.24*
15. # of non-hostile takeovers           580.84     1690.45    .80*    .27*   -.39* -.14*     .11    .31*    .24*   -.17*    .10   .81*    .23* .82* -.08 .19*



*
    p < .01

Note: The countries included in the sample are: Argentina, Australia, Austria, Belgium, Brazil,
Canada, Chile, Denmark, Egypt, Finland, France, Germany, Greece, India, Ireland, Israel, Italy,
Japan, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Peru,
Portugal, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Turkey, United Kingdom,
United States, and Venezuela.
TABLE 2
Negative Binomial Regressions (using GEE for panel data) of the Number of Hostile Takeovers


                                Hypothesis     GEE          FEs

Shareholder rights                H1: +         .533       1.653
                                               4.44***     4.16***
Worker rights                     H2: -        -.016       -.076
                                              -2.17*      -2.46*
Banks’ rights                     H3: -        -.336      -1.414
                                              -3.37**     -3.44**
Macroeconomic uncertainty           -          -.174       -.057
                                              -1.31        -.19
Individual freedoms                 +           .431        .836
                                               4.42***     2.05*
Size of the labor force b           +          -.001       -.001
                                              -2.15*       -.18
# listed companies a                +           .300       -.002
                                                .97       -1.72
# listed companies squared b                   -.619        .012
                                              -2.17*       1.29
Turnover ratio                      +          -.008       -.004
                                              -2.16*       -.62
Total stock market return           -           .592       -.751
                                               1.32        -.62
GDP growth rate                     +           .052       -.052
                                               1.21        -.69
GDP per capita a                    ?          -.025        .026
                                              -1.85         .63
% with a foreign acquirer           +          1.030       1.282
                                               3.88***     1.31
# of non-hostile takeovers a        +          1.023       1.661
                                               5.65***     2.83**
Lagged # of hostile takeovers       +           .018
                                               1.36
Country fixed effects                        Excluded    Included

Annual dummies                               Included    Included

Intercept                                    -11.754      -23.871
                                             -7.31***    -4.25***
N (number of observations)                   283            283
Number of countries                          28              28
Wald Chi-Square                              4512.8        102.12

Notes:
a
  Coefficient multiplied by 1,000.
b
  Coefficient multiplied by 1,000,000.
z scores shown in parentheses beneath regression coefficients.
*** p < .001 ** p < .01 * p < .05 (two-tailed tests)
         Summary of Results
• Support for shareholder rights (H1).
• Support for labor rights (H2).
• Support for banks’ rights (H3).
             Conclusions
• Hostile takeovers systematically
  related to the institutionalized power of
  stakeholders.
• Hence, different conceptions of the
  firm prevail in different countries.
• Two key implications:
  – Institutional boundaries matter.
  – One can identify, and hence manage, the
    sources of variation.
  Breakdown by Selected Country
   Country   % hostile % non-h        Country     % hostile   % non-h
Australia     11.68     3.15     Japan              0.11       0.75
Austria        0.21     0.55     Malaysia           0.32       1.80
Canada         9.37     5.91     Netherlands        0.42       1.90
Chile          0.11     0.16     New Zealand        0.95       0.69
Finland        0.11     1.36     Sweden             1.26       1.52
France         2.11     5.01     Switzerland        0.63       0.86
Germany        0.11     3.64     Thailand           0.21       0.29
Israel         0.00     0.16     United Kingdom    23.16       13.78
Italy          0.63     2.40     United States     45.37       45.81
Jamaica        0.11     0.02     TOTAL N            950       221,828
Central Bank Independence
Table 1: Sample Descriptive Statistics (N=600, 71 countries)

Variable                              Mean    Std. Dev.    Min       Max

Central Bank Independence, CBI
(logit)                               -0.18       0.90      -2.20       2.44
Trade Openness (Imports +             69.8
Exports)/GDP                             1      50.62       13.24     396.68
                                         -
                                      16.2
Inward FDI Stock (% of GDP), logged      8        1.39     -36.19     -13.78
IMF Lending (% of GDP)                0.01        0.02       0.00       0.13
EU Membership (=1)                    0.15        0.36       0.00       1.00
NAFTA Membership (=1)                 0.03        0.16       0.00       1.00
Cohesion in Trade                     0.41        0.11       0.17       0.75
Role Equivalence in Trade             0.53        1.11      -3.79       3.31
Cabinet Changes                       0.50        0.60       0.00       4.00
Elections                             0.28        0.45       0.00       2.00
                                      3488
Weighted Conflict Index                 .58   6413.01        0.00   77037.00
Checks & Balances                     6.74        5.15      -8.00      10.00
Party Fractionalization Index         6.45        2.05       0.00       9.71
                                         -
Outward FDI Stock (% of GDP),         18.1
logged                                   6        3.65     -37.22     -13.95
                                      12.1
GDP per capita/1000                      7      12.30        0.08      45.95
Government Consumption (% of          16.4
GDP)                                     9        5.49       2.98      43.48
                                      108.
Consumer Price Index (%)                55     140.62        0.00    2567.04
                                      1994
Year                                    .25       3.18    1989.00    1999.00
               Network Effects
• Cohesion in Trade Effectit =
      j CBI jt-1 × (Trade ijt-1/Trade it-1).
• Role Equivalence in Trade Effectit =
      j CBIjt-1 × r (PSVit-1, PSVjt-1)
Where:
EPSVit = Exportsikt-1/k Exportsikt-1
IPSVit = Importsikt-1/k Importsikt-1
PSVit = [EPSVit , IPSVit]
Table 3: Fixed-Effects Regressions with Panel-Corrected Standard Errors (PCSEs) of Central Bank Independence (CBI), 71 countries,
1990-2000 (600 country-years). Standardized coefficients and z-statistics.
Variable (Hypothesis, sign)             Model 1     z-statistic Model 2    z-statistic Model 3     z-statistic Model 4   z-statistic
Trade Openness (H1+)                           0.225 **        2.37    0.169*       1.81    0.225 **     1.99     0.281 ***     2.83
Inward Foreign Investment (H1+)                0.147 ***       3.97    0.154 ***    4.14    0.131 ***    3.63     0.127 ***     3.69
IMF Lending (H1+)                              0.127 ***       3.95    0.108 ***    3.08    0.112 ***    2.94     0.134 ***     3.93
EU Membership (H2+)                                                    0.255 **     2.54    0.226 **     2.35     0.206 **      2.19
NAFTA Membership (H2+)                                                 -0.043 **    -2.38   -0.030 *     -1.91   -0.016        -1.06
Cohesion in Trade (H3+)                                                                     0.193 ***    2.63     0.176 **      2.53
Role Equivalence in Trade (H4+)                                                                                   0.196 ***     4.44
Cabinet Changes                                0.020           0.67    0.009        0.32    0.009        0.33     0.015         0.56
Elections                                     -0.008           -0.36   -0.003        -0.1   -0.001       -0.04    0.000        -0.01
Weighted Conflict Index                       -0.040           -1.57   -0.026         -1    -0.019       -0.68   -0.018        -0.64
Checks & Balances                              0.189 ***       3.51    0.206 ***    3.62    0.183 ***    3.23     0.172 ***      2.9
Party Fractionalization Index                 -0.146 ***       -3.58   -0.123 ***   -3.51   -0.107 ***   -3.12   -0.116 ***    -3.45
Outward Foreign Investment                    -0.085 **        -2.44   -0.073 **    -2.39   -0.089 **    -2.37   -0.089 **     -2.37
GDP per capita                                 0.888 **        0.03    0.492        0.97    0.506        1.06     0.711         1.48
Government Consumption                         0.146 **        2.31    0.116 *      1.93    0.116 *       1.9     0.153 **      2.35
Consumer Price Index                          -0.035 ***       -2.67   -0.020 *      -1.9   -0.031 **    -2.33   -0.047 **     -3.05
Year                                           0.276 ***       7.56    0.216 ***    6.88    0.110 **     2.14     0.095 *       1.83
R-squared                                        0.732                 0.756                0.761                 0.766
*** p<.01 ** p<.05 * p<.10 (two-tailed).
The dependent variable is a logit transformation of the CBI index.
All independent variables measured with one-year lags.
Country fixed-effects are included in all models.

				
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