Private Benefits of Control, Antitakeover Defenses and the Perils of Federal Intervention


This paper develops a theory that sheds light on recent evidence according to which high quality issuers are the ones that adopt defenses in the IPO, and keys this behavior to the existing literature on private benefits of control. The paper analyzes the decision of the pre IPO owners concerning takeover defenses. This decision is shown to be influenced by the quality of the venture that goes public. High quality in firms that go public often means an abundance of growth and business opportunities, rather than sizeable existing assets. In such ventures managers are unlikely to consume much harmful control benefits, but they nevertheless derive a great deal of non-monetary control benefits from their stint in the promising entity. Consequently, takeover defenses help the pre-IPO owners to preserve their non-monetary control benefits without causing too much harm to the value of the enterprise. The argument of this paper is consistent with recent empirical evidence, which indicates that takeover defenses appear in the IPO in instances where defenses are highly beneficial for managers by shielding their positions in risky environments and that better underwriters serves the issuers that adopt defenses. The paper also shows that even if the conventional assumption that takeover defenses are harmful to shareholders is taken as given, then the inimical influence of takeover defenses is hard to trace, since the issuers that adopt them are those which shareholders should prefer in the first place. Finding a matching sample for the adopting issuers may therefore be an impossible task. The discussion also considers possible extensions that result from complications of asymmetric information, and finally concludes with the perils of federal intervention.


Business Organizations Law

Date of this Version

September 2004