The Effect of Takeover Protection in Quiet Life and Bonding Firms

Internal slack is a primary contributor to agency problems. Consequently, shareholders’ updated valuation of internal slack reveals their revised assessment of potential agency conflicts. We study how the value of internal cash changes following different state antitakeover regulation events. After addressing the critiques of such experiments, we find that the value of cash increases, on average, following antitakeover law implementation, but there is considerable heterogeneity in how the value changes. Firms susceptible to quiet-life agency problems exhibit a decrease in the market-assessed value of internal slack. Conversely, cash appreciates in companies where takeover protection helps bond commitments with major counterparties.