Increase in Takeover Protection and Firm Knowledge Accumulation Strategy

Abstract

We argue that the extent to which a firm faces takeover threats affects its knowledge structure. In particular, takeover threats may lead to managers’ reluctance to adopt a strategy toward firm-specific 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 firm-specific knowledge. Further, the relationship between takeover protection and firm-specific knowledge is positively moderated by managerial ownership, which helps align managerial interests with those of shareholders. But the relationship is negatively moderated by managerial tenure, as long-tenured managers have already committed to their firms. Using a differences-in-differences method with Delaware antitakeover rulings in mid-1990s as an exogenous shock, we found results supporting these arguments.

Keywords: Takeover Threats, Knowledge Accumulation, Innovation

JEL Classification: G31, G34