Capital structure and corporate control：The effect of antitakeover statutes on firm leverage.docVIP

Capital structure and corporate control：The effect of antitakeover statutes on firm leverage Capital structure and corporate control:The effect of antitakeover statutes on firm leverageGerald T. GarveyGordon Hanka** Garvey is from the Faculty of Commerce and Business Administration, University of BritishColumbia. Hanka is from the Smeal College of Business Administration, Pennsylvania StateUniversity. Thanks to Ron Giammarino for suggesting the use of second-generation antitakeoverlaws and to Jon Karpoff for providing data on such laws. For comments and suggestions we thankLuigi Zingales, Rajesh Aggarwal, Bob Gregory, Peter Hartley, Rob Heinkel, Joseph Hirshberg,Burton Hollifield, Walter Novaes, Rohan Pitchford, Laura Field, Harold Mulherin, ChrisMuscarella, Ed Rice, Paul Malatesta, and the participants of the Penn State and University ofWashington Finance workshops, the Utah Winter Finance Conference, and the American FinanceAssociation conference. AbstractWe find that firms protected by Second Generation state antitakeover laws substantially reducedtheir use of debt, while unprotected firms did the reverse. This result supports recent models inwhich the threat of hostile takeover motivates managers to take on debt that they would otherwiseavoid. An implication is that legal barriers to takeovers may increase corporate slack.JEL Classification Numbers G32, G341 Corporate managers have discretion over capital structure choices, as the firm s foundingshareholders cannot write a comprehensive ex ante contract specifying all future financingdecisions. Most capital structure models make the simplifying assumption that managers choosecapital structure in the interests of shareholders. Examples of this approach range from the classicstatic tradeoff between tax benefits and expected costs of financial distress, to Leland and Toft s(19976) dynamic analysis which allows for agency problems between debtholders and shareholders.Increasingly, however, research into capital st