Antitakeover Amendments and Managerial Entrenchment: New Evidence from Investment Policy and CEO Compensation

We explore the relation between antitakeover amendments and firm investment in long-term assets. Empirical results indicate that an increase in the G-index of Gompers et al. (2003) is associated with less investment in R&D and reduced capital expenditures. These results suggest that protection from takeover threat increases managerial entrenchment and results in underinvestment. We also find that this increased entrenchment is associated with higher total and cash compensation and fewer performance incentives for managers, suggesting that protected managers influence their own pay. These results are robust to a number of robustness checks and remain significant after controlling for industry effects. Overall, our results support the managerial entrenchment view—both investment decisions and CEO compensations reflect significant agency costs for firms with higher managerial entrenchment from antitakeover amendments.