An empirical investigation of the effect of corporate charter antitakeover amendments on stockholder wealth

This paper tests competing theoretical explanations for the passage of corporate charter antitakeover amendments. The managerial entrenchment hypothesis suggests that antitakeover amendments are adopted by incumbent management to obtain job security at stockholders' expense. An alternative hypothesis is that antitakeover amendments are proposed in order to enable the management of the target firm to extract a higher price from the bidding firm and thereby benefit stockholders. Our event study from a sample of 409 firms that adopted antitakeover amendments in the 1974–88 period indicates a strongly negative effect on stockholder wealth, in support of the managerial entrenchment hypothesis that antitakeover amendments are adopted by managers at the expense of stockholders.