Supermajority provisions and shareholders wealth: Evidence from South Korea's natural experiment

Abstract

Research Question/Issue The existing research continues to debate whether firms' anti-takeover provisions enhance or harm shareholders' wealth. In this study, we examine the causal relation between the supermajority provision and shareholders' wealth by employing a quasi-natural experiment: the two court rulings that weaken the anti-takeover force of the supermajority provision in Korea, where the supermajority provision is the most widely used anti-takeover provision. Research Findings/Insights Using market reactions around the two court rulings, we find that firms with a supermajority provision as their only anti-takeover provision significantly underperform on average, compared with firms with no provision. This finding is robust to various empirical approaches that aim to address potential endogeneity concerns. We also find evidence that the supermajority provision plays a more significant role for firms with long-term investments, higher complexity, or higher takeover threats. Furthermore, the second among the two court rulings appears to have a stronger impact on the firm value and institutional investors' selling compared with the first one, suggesting the reinforcing effect of similar court decisions. Theoretical/Academic Implications Our study contributes to the corporate governance literature by investigating the effect of the supermajority provisions on shareholders' wealth. While conventional wisdom holds that the anti-takeover provisions harm shareholders' rights and wealth, our evidence from the quasi-natural experiment in Korea suggests that the positive effect of the supermajority provision empirically dominates the negative effect. Overall, our study supports the value-enhancing perspective on the supermajority provision, indicating that the Korean stock market views such a provision as inducing higher shareholders' wealth. Practitioner/Policy Implications This study highlights that a more contextual view of the relation between the anti-takeover provisions and shareholders' wealth is necessary. Moreover, we suggest that a regulation prohibiting firms' anti-takeover provisions might harm shareholders' wealth, but it appears that a firm-specific approach should be considered.