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

• Published date: 01 May 2022
• Author: Hyeong Joon Kim,Seung Hun Han
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/corg.12402

ORIGINAL ARTICLE

Supermajority provisions and shareholders wealth: Evidence

from South Korea's natural experiment

Hyeong Joon Kim | Seung Hun Han

School of Business and Technology

Management, College of Business, Korea

Advanced Institute of Science and Technology,

Daejeon, Republic of Korea

Correspondence

Seung Hun Han, School of Business and

Technology Management, College of Business,

Korea Advanced Institute of Science and

Technology, 291, Daehak-ro, Yuseong-gu,

Daejeon, Republic of Korea.

Email: synosia@kaist.ac.kr

Funding information

National Research Foundation of Korea,

Grant/Award Number: NRF-

2018H1A2A1060309

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 superma-

jority 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 sig-

nificantly underperform on average, compared with firms with no provision. This find-

ing 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 com-

pared with the first one, suggesting the reinforcing effect of similar court decisions.

Theoretical/Academic Implications: Our study contributes to the corporate gover-

nance literature by investigating the effect of the supermajority provisions on share-

holders' wealth. While conventional wisdom holds that the anti-takeover provisions

harm shareholders' rights and wealth, our evidence from the quasi-natural experi-

ment in Korea suggests that the positive effect of the supermajority provision empiri-

cally 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 neces-

sary. Moreover, we suggest that a regulation prohibiting firms' anti-takeover provi-

sions might harm shareholders' wealth, but it appears that a firm-specific approach

should be considered.

KEYWORDS

anti-takeover provisions, corporate governance, firm value, quasi-natural experiment,

shareholders' wealth

Received: 13 August 2020 Revised: 17 August 2021 Accepted: 18 August 2021

DOI: 10.1111/corg.12402

Corp Govern Int Rev. 2022;30:311–334. wileyonlinelibrary.com/journal/corg © 2021 John Wiley & Sons Ltd 311

1|INTRODUCTION

Anti-takeover provisions remain one of the most controversial topics

in the corporate governance literature. Conventional wisdom holds

that such provisions weaken shareholders' rights and insulate direc-

tors from dismissal. Hence, under such provisions, incumbents may

become inefficient at the shareholders' expense. However, by making

removal harder, the anti-takeover provisions may allow directors and

management sufficient time to create long-term shareholders' wealth.

The literature has still not fully resolved this long-standing debate. In

this study, we thus aim to shed light on these conflicting perspectives

by focusing on the most widely used anti-takeover provision in our

sample, under which firms require a supermajority-voting rule at their

annual meetings.

The value-destroying perspective emphasizes the costs of anti-

takeover provisions. Such provisions allow directors to become

entrenched, even those who are self-interested, and thereby, agency

problems arise. Theoretically, shirking, private benefit expropriation,

and empire-building are more likely to be encouraged (Bertrand &

Mullainathan, 2003; Jensen, 1993; Manne, 1965). In addition, Harris

and Raviv (1988) show that rather than the simple majority voting

rule, other majority rules (e.g., supermajority voting) that can be used

as takeover defenses are socially suboptimal. As a result, the anti-

takeover provisions increase agency costs (Jensen & Meckling, 1976)

and, thus, are expected to reduce firm value. A stream of empirical

studies supports this value-destroying perspective. In particular,

Bebchuk et al. (2009) and Gompers et al. (2003) show the strong cor-

relation between a higher number of anti-takeover provisions and

lower firm value. Furthermore, several studies find that anti-takeover

provisions (described as a lower quality of corporate governance) are

negatively associated with overall performance, including accounting

performance, reinvestment rates, beneficial acquisition offers, and

post-merger performance (Bebchuk & Cohen, 2005; Cohen &

Wang, 2013; Cremers & Ferrell, 2014; Faleye, 2007; Giroud &

Mueller, 2011; Masulis et al., 2007).

The value-enhancing perspective argues that the anti-takeover pro-

visions can be beneficial to the firms, as suggested in several theoreti-

cal studies (Chemmanur & Jiao, 2012; Stein, 1988, 1989). In

particular, Stein (1988, 1989) posits that such provisions mitigate

overinvestment in short-term projects and help directors avoid ineffi-

cient short-termism (or myopic pressure). Such provisions also can dis-

courage directors from acting opportunistically toward the firm's

stakeholders (e.g., large customers). In addition, the provisions reduce

the stakeholders' risk by securing stability and continuity in manage-

ment, as the firm's business plan cannot easily be reversed. Therefore,

the cost of the relationship between a firm and its stakeholders

decreases, and firm value improves (Knoeber, 1986; Shleifer &

Summers, 1988).

1

In the case of takeover attempts, the anti-takeover

provisions strengthen bargaining power and, thus, can extract a higher

acquisition premium (DeAngelo & Rice, 1983; Stulz, 1988). Consistent

with this value-enhancing view, empirical evidence supports the anti-

takeover provisions raising shareholders' wealth (e.g., Cremers

et al., 2017; Daines & Klausner, 2001). Specifically, a number of

studies show that the positive association between the anti-takeover

provisions and firm value is significant for innovative firms; these

studies support the theoretical argument related to myopic pressure

(Bhojraj et al., 2017; Daines, 2001; Daines et al., 2018; Duru

et al., 2013; Humphery-Jenner, 2014).

Although prior empirical studies robustly show a positive or nega-

tive relationship between the anti-takeover provisions and firm value,

one might still argue that it is unclear whether such correlations are

causal because of several endogeneity concerns.

2

In addition, there

might be heterogeneity among the various anti-takeover provisions,

making the estimation of the average effect of all the anti-takeover

provisions difficult. Hence, it is worth focusing on an individual anti-

takeover provision as the effect of the anti-takeover provisions is

challenging to generalize. In this study, we aim to contribute to the

large body of corporate governance literature through a quasi-natural

experiment. Specifically, we exploit two court rulings that make the

anti-takeover force of the supermajority provision potentially weaker

for publicly traded firms in Korea, in line with prior research that used

a legal context as a quasi-natural experiment (Bhargava et al., 2017;

Cain et al., 2017; Cohen & Wang, 2013; Daines et al., 2018; Karpoff &

Wittry, 2018; Larcker et al., 2011). We also note that our study esti-

mates the effect of the supermajority provision (but not all the anti-

takeover provisions) owing to the given nature of our empirical

design.

In particular, we examine the cross-section of stock returns

around the two court rulings in Korea in 2007 and 2008. We find a

significantly negative market reaction over the 3-day window, 1.05

percentage points on average, for treated firms (i.e., firms with a super-

majority provision as their only anti-takeover provision). Our baseline

regressions also show that treated firms significantly underperform

control firms (i.e., firms with no anti-takeover provisions). Overall, we

find a negative association between shareholders' wealth and the two

court rulings that weaken the anti-takeover force of the supermajority

provision, consistent with the value-enhancing perspective (Bhojraj

et al., 2017; Cremers et al., 2017; Daines et al., 2018; Daines &

Klausner, 2001).

To further explore our main results in terms of the legal perspec-

tive, we investigate the impacts of the two court rulings (separately)

including the data for trading behavior. Here, we find that the nega-

tive value impact of the second court ruling on treated firms is strongly

supported, but that of the first court ruling is weakly supported. In

addition, institutional investors are more likely to sell their shares of

treated firms compared with control firms, particularly around the

second court ruling. These results confirm the real effect of the prece-

dent on the Korean stock market (although the Korean legal system

follows the German-origin civil law). Taken together, we cautiously

suggest that a reinforcing effect of the second court ruling, which has

a similar court decision to the first court ruling, might be observed.

We adopt several empirical approaches to mitigate potential bias

concerns. First, we use propensity score matching (PSM) as the mar-

ket's views with respect to firm characteristics may differ between

treated and control firms. Second, we conduct a sample of firms with

anti-takeover provisions that did not change over the first and second

312 KIM AND HAN