Journal of Financial Economics 25 (1989) 263-290. North-Holland

MANAGERS’ VOTING RIGHTS AND CORPORATE CONTROL

Wayne H. MIKKELSON and M. Megan PARTCH*

UnicersiQ of Oregon, Eugene, OR 97403, USA

Received October 1988, final version received May 1990

We document managers’ vote holdings in a large random sample of industrial firms, and test whether the degree of managerial control of shares affects how often a firm is the target of control events. The likelihood of successful acquisitions of firms is unrelated to managers’ holdings. But this insignificant relation reflects two opposing effects. Lower managerial control is associated with a higher probability that a firm will receive a takeover offer, but a lower probability that a takeover attempt will lead to a change in control.

1. Introduction

Despite great interest in how managers’ control of shares affects events in the market for corporate control, evidence on the issue is sparse. Walkling and Long (1984), Merck, Shleifer, and Vishny (1988b), and Broadman (1989) report that managers’ share ownership affects their response to takeover attempts for their firm. But there is little evidence that managers’ control of shares affects the likelihood a firm will be a takeover target.’

We document the extent of managers’ voting control in a broad sample of U.S. industrial firms, and examine whether this control is related to the occurrence of events such as toehold investments, takeover offers, and the outcomes of takeover offers. Our tests control for the use of staggered voting for directors, the presence of substantial blockholdings, the amount of financial leverage, and total firm value.

*We would like to thank Brad Barber, Larry Dann. Jenny Gaver. Kenneth Gaver, Clifford Holderness, Christopher James, Cole Kendall, Chuck O’Kelley, Artur Raviv, Richard Ruback (the editor), Dennis Sheehan, Rene Stulz, Ralph Walkling, Paul Asquith (the referee), as well as seminar participants at Arizona State University, Pennsylvania State University, Purdue Univer- sity, the University of British Columbia, and the University of Oregon for helpful suggestions. We thank John Byrd, Ronald Budde, James Fries, Hailu Regassa, and Michele Woo for assistance in collecting data and Cedric Antosiewicz for assistance in computer programming. We are also grateful for research support we received from the Graduate School of Business of the University of Chicago while we were visiting professors.

‘See Jensen and Warner (1988) and the articles they reference. In addition, Song and Walkling (1989) investigate the relation between the percentage of shares owned by managers and the probability that a firm will be a takeover target.

0304-405X/89/%3.30 D 1989, Elsevier Science Publishers B.V. (North-Holland)

264 W.H. Mikkelson and .KVf. Parxh, Managers’ rating rights and corporate control

We find no association between the proportion of shares controlled by a firm’s officers and directors and the likelihood that a firm will be taken over. Our estimates of the probability that a firm will undergo a change in control vary only between 0.16 and 0.17 across a range of managers’ voting control from less than 10% to more than 50% of outstanding votes.

The lack of association between managers’ voting rights and changes in control, however, obscures the influence of managers’ holdings on both the initiation and the success of attempts to acquire control of a firm. Managers’ control of shares is negatively related to the incidence of takeover attempts by outsiders, as well as to the incidence of managerial resistance to takeover attempts. In contrast, the probability that a takeover attempt will lead to a change in control is positively related to target managers’ voting control. This positive association is found for both resisted and unresisted offers.

More than any other variable we study, firm size explains the occurrence of control events. Smaller firms are more often the target of toehold invest- ments and takeover attempts, and the takeover offers they receive more often lead to a change in control. We suspect that smaller firms are less costly to acquire, which affects a bidder’s choice of target firm as well as the outcome of takeover negotiations.

We find that the financial leverage of the target firms has no effect on the incidence of takeover offers or the outcome of takeover attempts, but that toehold investments are more likely for more highly leveraged firms.

Staggered voting for directors has no reliable association with the occur- rence of control events. Staggered voting does not appear to deter outsiders’ interest in takeover activity, nor does it identify managers who are likely to resist takeover offers.

Firms with a blockholder who sits on the board of directors are more likely to undergo a change in control than firms without such a blockholder. We find no evidence, however, that blockholders who do not sit on the board facilitate or deter takeover attempts or control changes.

We conclude that managers’ holdings of votes have observable effects on the actions of managers and outsiders in the market for control. Greater managerial control reduces the likelihood of takeover offers, yet increases the likelihood that a takeover offer will uhimately lead to a change in control. Consistent with these offsetting effects, the probability that firms will experi- ence a takeover offer that results in a control change is unrelated to managers’ voting control.

2. Possible effects of managers’ voting control

Common stock typically bundles residual claims on the firm’s earnings and assets with the right to vote in elections of directors and on other matters. As discussed by Fama and Jensen (1983) and by Easterbrook and Fischel(19831,

W. W Mikkelson and MM. Pmch, Managers c,oting rights and corporate control 265

this bundling is important because it ties managers’ voting control to their economic stake in their firm.

The bundling of votes and financial claims does not imply a clear predic- tion about the association between managers’ voting power and the incidence of control events. Managers’ ability to thwart takeovers is directly related to the proportion of votes they control, but so are their payoffs from a takeover offer. When managers’ voting power is great, their personal financial rewards from a takeover are similarly great.

Stulz (1988) argues that when managers have little voting power, they cannot block unwanted takeover attempts. Jensen and Meckling’s (1976) argument that conflicts of interest between managers and stockholders are greatest when management owns few shares also implies an inverse relation between managerial voting control and the incidence of control changes. Potential gains from takeovers that discipline managers should be greatest when target managers own few shares.

These arguments ignore the effect of economic incentives created by share ownership. Walkling and Long (1984) and Merck, Shleifer, and Vishny (1988a) find that managers with relatively high ownership are less likely to resist tender offers. Broadman (1989) finds that the likelihood an initial takeover offer will succeed is directly related to the payoffs to target man- agers. Both pieces of evidence are consistent with the view that when target managers control many votes, more takeover offers succeed. Relatively high management ownership can also lead to more successful takeover attempts if the costs to bidders of negotiating with a small number of large shareholders are less than the costs of negotiating with managers who have few sharehold- ings and represent a diverse group of stockholders.

Additional support for a positive relation between the incidence of control events and managers’ voting control comes from the arguments of Demsetz (1983) and the findings of Merck, Shleifer, and Vishny (1988b). They suggest that managers are less likely to maximize firm value when they have majority voting control and therefore are insulated from unwanted takeover attempts. The reduced market value of firms with majority ownership by managers can attract takeover offers.

3. Description of the sample

Our initial sample of 240 industrial firms was selected at random from a population defined as follows:

(1) Firms are represented in the Center for Research in Security Prices (CRSP) daily returns file throughout 1972. The CRSP database includes companies listed on the American or New York Stock Exchange. There were 2,556 firms listed throughout 1972.

266 W. H. Mkkzlson and M.M. Panch, Managers’ coring rights und corporate connol

(2) Firms are included in Moody’s Industrial Manual in 1972. This excludes banking, insurance, and other financial companies as well as utilities and transportation companies.

We follow the firms in our sample through 1987. Forty-three percent, or 104 of the original 240 firms, were still publicly traded at the end of that year.

As firms depart from the sample, by being acquired, going private, or going into bankruptcy or liquidation, they are replaced by the industrial firm that entered the CRSP file on the date closest to the departing firm’s date of departure. Our sample, therefore, maintains an age distribution, as measured by the number of years that firms have been nationally listed, that is representative of the population of industrial firms included in the CRSP file.

The number of firms departing the sample each year ranges from five (or 2% of the sample) in 1975 to 19 (or 8%) in 1984. An increase in the frequency of departures occurred in 1978 and persisted thereafter.

4. Managers’ control of voting shares

For each of the years 1973, 1978, and 1983, we examined the annual meeting proxy statement for each firm in our sample. If proxy statements for these years were unavailable we substituted proxy statements from nearby years. We were unable to obtain proxy statements for five firms. From the proxy statements, we collected data on the number of shares of common stock and voting preferred stock owned directly or indirectly by a firm’s top three officers (chief executive, president, and chairman of the board) and by the board of directors. We include voting shares held by members of an officer’s or director’s family, by trusts for any family member’s benefit, and by corporations or foundations controlled by the family. In effect we measure the number of votes assigned to all of the voting securities associated in the proxy statement with a particular officer or director.

We focus on the percentage of outstanding votes controlled by officers and directors as a group (a>. Table 1 presents summary statistics for groups of observations defined by ranges of LY in the pooled 1973, 1978, and 1983 samples. The mean and median percentages of votes controlled by officers and directors are 19.6% and 13.9%. Overall, the percentage of votes con- trolled by officers and directors is less than or equal to 10% for 42% of the observations.

The mean and median percentages of votes controlled by the chief execu- tive, president, and chairman of the board are presented in column 5. The correlation between votes controlled by the holders of the top three offices and votes controlled by officers and directors is 0.80. In the remainder of the paper we focus on the proportion of votes controlled by officers and direc- tors. Our results are not materially affected by whether we examine officers’ and directors’ combined ownership or the ownership of the top three officers.

W W Mikkelson and .V..W Panch. .Clanagers’ coring rights and corporate control 267

Table 1

Measures of ownership for subsamples defined by percentages of votes controlled by otlicers and directors of pooled samples of 140 industrial firms listed on the New York or American Stock

Exchange in 1973, 1978. or 1983.”

Mean Mean (median)

(median) percentage percentage of votes

Percentage of of votes controlled by votes controlled Number controlled holders of the by officers and of obser- directors (ajb

by officers and directorsb

top three vations Frequency officesC

al IO 304 0.42 2.8% 1.9% (1.7) (0.0)

10 <a I20 128 0.18 11.9 8.1 (14.7) (7.4)

20 < a I 30 94 0.13 24.7 14.1 (24.4) (14.6)

30 < a I 40 70 0.10 34.8 21.1 (34.7) (20.3)

JO < (2 I 50 52 0.08 45.2 27.9 (44.9) (30.1)

50 < a I 75 65 0.08 60.9 38.7 (61.6) (40.8)

75 <ff 2 0.01 92.6 55.8 (92.6) (55.8)

Total sampled.e 715 1 .oo 19.6 11.9 (13.9) (4.7)

“The original sample was selected at random from firms listed on a national exchange throughout 1972 and included in Moody’s Indmtrial Manual in 1972. Each departure from the sample was replaced by an industrial firm that was initially listed on a national exchange on a date as close as possible to the date the departin g firm was delisted. Thus the sample size remains at 240 every year. Data for the sample firms in 1973, 1978, and 1983 are pooled.

bThis measure is defined as the percentage of outstanding votes controlled by officers and directors, their family members. trusts for their benefit, and corporations or foundations they control, as reported in the annual meeting proxy statement.

‘The top three offices are the chief executive. president, and chairman of the board. d We were unable to obtain ownership data for five firms. eThe standard deviation of the percentage of votes controlled by officers and directors is

19.5%. The standard deviation of the percentage of votes controlled by holders of the top three offices is 15.3%.

We find no pervasive change from 1973 to 1983 in managers’ control of shares. The mean proportion of votes controlled by officers and directors is 19.8% in 1973, 20.5% in 1978, and 18.5% in 1983. The frequency of observations in the ranges of managers’ ownership presented in table 1 does not change materially across the three years of measurement. For firms that remained in existence from 1973 through 1978 or from 1978 through 1983 (a

268 W. H. Mikkelson and M. M. Partch. Managers ’ toting rights and corporate control

total of 388 observations), we measured the change in managers’ holdings of votes over the five-year periods. Measures of managers’ ownership generally do not change appreciably in these intervals. For example, two-thirds of the firms experienced a change in managers’ holdings of votes, measured as a change in decima1 value, of less than 0.05 in absolute value.

The mean and median proportions of votes controlled by officers and directors that we report are generally higher than the proportions reported by Jensen and Warner (19881, who summarize measures of managers’ owner- ship reported in a number of recent studies. Those studies, however, examine samples limited to large firms or firms undertaking a particular action, such as the adoption of a charter amendment. Our sample, in contrast, is a cross-section of randomly selected firms. Because our sample is free of selection bias we believe our measures are useful benchmarks for assessing managers’ voting control. In the appendix we present summary measures of managers’ proportionate control of shares for firms grouped by the market value of equity.

5. Determinants of managers’ control

Managers’ voting power may be affected by factors other than their direct control of votes.* For example, total firm value can affect managers’ voting power because it corresponds to the amount of resources available to managers to resist a takeover and therefore to the costs of acquiring control of the firm. Increases in leverage that leave total firm value unchanged, such as a stock repurchase or a debt-for-equity exchange offer, also increase managers’ voting power. Staggered voting for directors strengthens managers’ control by raising the costs to outsiders of obtaining majority representation on the board. The size of significant blockholdings can lessen or increase managers’ control over the firm’s policies, depending on whether blockhold- ers oppose or support management’s policies.

We document these factors for our samples of firms and relate them to our measures of managerial control of votes. The value of the firm includes the market value of common stock, the book value of preferred stock, and the book value of long-term debt and current liabilities. The market value of shares is calculated using share price at the end of 1973, 1978, and 1983. All figures are in millions and have been converted to 1983 dollars. The leverage ratio is total book value of debt divided by the sum of total book value of debt, the book value of preferred stock, and the market value of equity. Balance-sheet data were collected from Moody’s lndusrriuf Manuals.

‘Brickley and James (1987) and Dann and DeAngelo (1988) provide evidence on actions managers take to compensate for less than complete voting control of their firms.

W W. Mikkelson and M.M. Panch, Managers roting rights and corporate control 269

From the proxy statements we collected information about voting rules, as well as substantial ownership of voting shares by individuals who are not officers or directors. Proxy statements report the use of staggered voting, but do not indicate whether a firm’s corporate charter includes a supermajority voting provision or a fair-price amendment. Beginning in 1973 firms were required to disclose in proxy statements the security ownership of holders of 10% or more of a class of voting securities. In 1978 the reporting require- ment was lowered to 5%.

We define three types of blockholders. The first type, unaffiliated block- holders, consists of individuals or corporations who have no representation on the board of directors. This category is most likely to include investors who monitor managers closely and who may oppose certain of their policies. The second type, affiliated blockholders, is defined as individuals or corpora- tions who are represented on the board. The third type is financial institu- tions, foundations, estates, or employee stock-ownership plans. We believe the second and third types include a larger fraction of investors whose interests are aligned with management, because they have board representa- tion or possibly financial dealings with the firtn3

5.1. Lecels of managers’ Coting control

Panel A of table 2 presents descriptive statistics on firm value, leverage ratio, frequency of staggered voting, and frequency and size of reported blockholdings for groups of firms defined by ranges of managers’ voting rights. Panel B reports simple as well as partial correlations between man- agers’ voting rights and the measures described in panel A. We find a significant negative association between managers’ voting rights and firm value. The simple correlation between firm value and cx is -0.48, consistent with the results of Demsetz and Lehn (1985). Firm value is more highly correlated with managers’ proportionate control of votes than with any other firm characteristic we examine.

Leverage is unrelated to the proportion of votes controlled by officers and directors, in contrast to the findings of Friend and Lang (19881, who report a negative association between management stockholdings and leverage.

Staggered voting is negatively correlated with managers’ voting rights. Sut only when the proportion of votes controlled by managers exceeds 0.40 does the frequency of staggered voting decline appreciably. For lower levels of ownership there is virtually no association between managers’ proportionate control of votes and staggered voting.

3Brickley, Lease, and Smith (1988) distinguish behveen blocks owned by individuals or corporations and blocks owned by institutional investors. Their evidence suggests these groups of blockholders vote differently on corporate charter amendments.

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stat

emen

ts.

6 sO

ther

b

lock

ho

lder

s in

clu

de

linan

cial

in

stit

uti

on

s,

fou

nd

atio

ns,

es

tate

s,

and

em

plo

yee

sto

ck

ow

ner

ship

p

lan

s.

Blo

ckh

old

ing

s ar

e re

po

rted

in

th

e 2

an;u

al

mee

tin

g

pro

xy

stat

emen

ts.

LX

We

wer

e u

nab

le

to o

bta

in

ow

ner

ship

d

ata

for

five

tir

ms.

‘P

ears

on

co

rrel

atio

ns

are

rep

ort

ed.

Sp

earm

an

ran

k co

rrel

atio

ns

wer

e al

so c

alcu

late

d;

they

ar

e ve

ry

sim

ilar

IO t

he

Pea

rso

n

corr

elat

ion

s.

Th

e lo

g o

f 2 8

firm

va

lue

was

use

d

in c

alcu

lati

ng

co

rrel

atio

ns.

‘S

ign

ific

ant

at 0

.01

leve

l. R

8 9 e

272 W. H. Mkkelson and M.M. Partch, Managers’ coring rights and corporate control

The frequency of each of the three types of blockholdings is about 0.10 in the entire sample. The average stake is approximately 13% of outstanding shares for unaffiliated and financial blockholders. For blockholders with board representation the average stake is almost 45%. Managers’ ownership of votes is negatively correlated with the proportion of votes controlled by each of the three types of blockholders. This negative association, however, may simply reflect that the sum of proportional shareholdings is bounded by one.

5.2. Changes in managers’ control

If managers take advantage of their opportunities to modify capital struc- ture or to change voting rules to maintain effective voting power when their proportionate vote ownership changes, we should find a relation between changes in managers’ control of votes and changes in other factors during the same periods.

We find no significant or systematic relations between changes in the proportion of shares controlled by officers and directors over five-year inter- vals and changes in other potential determinants of managers’ voting power. If other determinants of managers’ voting control affect managers’ vote ownership, our evidence suggests that the relation is between levels of these variables, rather than between changes in the levels. Therefore, in the tests that follow of a relation between managers’ voting rights and the incidence of control events, we control for the levels of other determinants of managers’ voting power.

6. Managers’ voting rights and control events

In section 6.1, we investigate the relation between managers’ control of voting rights and completed changes in control of firms. In section 6.2 we examine takeover attempts. The outcomes of takeover attempts are analyzed in section 6.3.

6.1. Changes in control

We classify firms by outcomes that occur within four years of our measure- ment of management ownership of voting rights in 1973, 1978, and 1983. The outcomes we consider are the completion of an acquisition by another party, completion of a going-private transaction, bankruptcy or liquidation, and still publicly traded. For example, a firm that was acquired in 1980 is classified as still traded in the 1973-1977 period, and as acquired in the 1978-1982 period. Firms with an outstanding offer to be acquired are classified as still

W W. MiXkeLson and MM. Parrch, Managers coring rights and corporate control 273

traded if the control transfer is not completed by the end of the four years following measurement of managers’ voting rights.

Panel A of table 3 presents the distributions of firms in 1973, 1978, and 1983 by one of the outcomes at the end of four years. Over time the proportion of firms acquired increases, from 10% in 1973-1977, to 15% in 1978-1982, to 23% in 1983-1987. The proportion of firms still publicly traded four years after our measurements of managers’ ownership falls from 85% in 1973 to 72% in 1983.

In panel B of table 3 we pool the data and report measures of vote ownership, firm value, leverage, staggered voting, and the presence of outside blockholdings for groups of sample firms defined by the four outcomes. The measures reported are taken at the beginning of the four-year periods in which outcomes are defined. A multinomial logit regression analysis of these data, based on the model presented by Theil (1969), is reported in table 4. The default outcome in our specification of the multinomial regression is still publicly traded. This means the coefficients we estimate must be interpreted as the effect of an independent variable on the log of the ratio of the probability of a control change, for example, to the probability of being still traded. The results of our analysis are not affected by whether we analyze subperiods separately or pool the data.

Our most striking finding is the absence of an association between manage- rial control of voting rights and the incidence of completed control changes in the following four years. The results in table 3 indicate that the mean and median proportions of voting rights controlled by officers and directors are very similar for the firms that remain traded and those that are acquired. Table 4 indicates that the likelihood of a completed acquisition is not related to managers’ holdings of votes, but is related negatively to total firm value at the 0.08 significance level. The holdings of an outside blockholder with board representation are positively related to the likelihood of a control change. Financial leverage, staggered voting, and blockholdings of investors without board representation are not related to the probability of a change in contr01.4

Because we test only for linear relations in table 4, we investigate whether the relation between managers’ voting rights and outcomes is nonlinear. In fig. 1 we present outcomes for groups defined by ranges of managers’ holdings. The proportion of firms acquired ranges from a low of 0.11 when managers own between 10% and 20% of votes to a high of 0.22 when managers own between 20% and 30% of votes. In the lowest (less than 10%)

4Holderness and Sheehan (1988) report no substantial difference between the incidence of control changes for firms with and without a majority shareholder. Palepu (1986) examines determinants other than managers’ shareholdings on the frequency of takeovers. He finds, as we do, that larger firms are less likely to be taken over. But Palepu also reports some evidence of an inverse relation between the probability of a takeover and financial leverage.

Tab

le

3

Mea

sure

s o

f o

wn

ersh

ip,

firm

va

lue,

an

d

leve

rag

e fo

r su

bsa

mp

les

det

ined

b

y o

utc

om

e fo

r p

oo

led

sa

mp

les

of

240

ind

ust

rilr

l fi

rms

liste

d

on

th

e N

ew

Yo

rk

or

Am

eric

an

Sto

ck

Exc

hu

ng

e in

lY

73,

lY78

, o

r IY

83.“

,h

_ ~_

.~

~~~_

~__

~~

._

_~_~

~

~ ~

~~

_ _

Ou

tco

me

wit

hin

fo

ur

year

s

Wen

t B

ankr

up

t o

r S

till

Acq

uir

ed

pri

vate

liq

uid

nte

d

t rad

rd

Pu

trd

A:

Nu

mb

er

of

tirm

s w

ith

o

utc

om

es

in f

ou

r-ye

ar

per

iod

s b

egin

nin

g

in

1973

, 19

78,

and

19

83

I973

25

2

8 19

7x

37

5 Y

19

83

54

10

7

I’md

B: M

easu

res

of

firm

ch

arac

teri

stic

s t;

lken

;I

I th

e h

egin

nin

g

of

the

fou

r-ye

ar

per

iod

s

To

tal

nu

mb

er

of

lirm

s’

I I6

17

24

Mea

n

(med

ian

) p

erce

nta

ge

of

VO

ICS

1X

.5%

34

.4%

31

.X%

co

ntr

olle

d

by

olli

cers

an

d d

irec

tors

” (1

3.(1

%%

,)

(22.

3%))

(2

Y.5

%)

Mea

n

(med

ian

) li

rm

vdu

re

$776

.0

53Y

5.Y

$l

Y7.

0 ($

150.

7)

($h

7.X

) ($

42.‘)

)

Mea

n

(med

ian

) le

vera

ge

rati

o’

0.47

0.

5x

0.74

(0

.4X

) (0

.5’~

) (0

.70)

Pro

po

rtio

n

of

lirn

is w

ilb

st

ng

ger

ed

voti

ng

fo

r d

irec

tors

0.

2 I

0.1x

0.

14

Pro

po

rtio

n

of

lirm

s w

ith

b

lock

s o

wn

ed

hy

un

allil

i;tt

ed

0.10

; 14

.3%

(l

o;

- 0

05.

7.4%

.

>

lirm

s o

r in

div

idu

als;

m

ean

(m

rdi;

m)

per

cen

tag

e o

f (1

0.3%

) (-

-_)

(7.4

%)

vote

s o

wn

ed

hy

hlo

ckb

old

ersg

205

IX’)

I 0

9

503 IX

.‘)%

C

IB.c

~%)

$182

7.6

($22

X.2

)

0.4x

(0

.4H

)

0.24

0. I

O;

12.3

%

(10.

4%)

Pro

po

rlio

n

of

firm

s w

ith

b

lock

s o

wn

ed

by

afti

tiat

ed

0.19

; 47

.2%

0.

24;

37.3

90

0.18

; 43

.9%

0.

06;

43.7

%

firm

s; m

ean

(m

edia

n)

per

cen

tag

e o

f vo

tes

ow

ned

b

y b

lock

ho

lder

s”

(4X

.6%

) (3

6.6%

) (4

4.2%

) (4

4.7%

)

Pro

po

rtio

n

of

firm

s w

ith

b

lock

s o

wn

ed

by

oth

ers;

m

ean

0.

16;

12.3

%

0.0;

-

0.14

; I 1.

9%

0.1

I;

15.0

%

(med

ian

) p

erce

nta

ge

of

vote

s o

wn

ed

by

bto

ckh

otd

ers’

(9

.3%

) (-

-_)

(I

1.8%

) (1

2.0%

) __

-.

___

_ ~.

__.

.~~.

“Th

e o

rig

inal

sa

mp

le

was

sel

ecte

d

at r

and

om

fr

om

fi

rms

liste

d

on

a n

atio

nal

ex

chan

ge

thro

ug

ho

ut

1972

an

d

incl

ud

ed

in

Mo

vdy’

s /r

~clu

s~ri

u/ Munuul

in

1972

. E

ach

d

epar

ture

fr

om

th

e sa

mp

le

wils

rep

lace

d

by

an

ind

ust

rial

fi

rm

that

w

as

init

ially

lis

ted

o

n

a n

atio

nal

ex

chan

ge

on

a

dal

e as

clo

se

as

po

pib

le

to t

he

dat

e th

e d

epar

tin

g

firm

w

as d

elis

ted

. T

hu

s th

e sa

mp

le

size

re

mai

ns

at 2

40

ever

y ye

ar.

Ou

tco

mes

re

Hec

1 ev

en&

th

at

occ

urr

ed

wit

hin

fo

ur

year

s o

f th

e m

easu

rem

ent

of

man

ager

ial

ow

ner

ship

o

f vo

tes.

A

cqu

ired

re

pre

sen

ts

tirm

s ac

qu

ired

b

y an

oth

er

firm

o

r p

arty

. W

ent

pri

vate

re

pre

sen

ts

con

tro

l ch

ang

es

that

w

ere

rep

ort

ed

as a

go

ing

-pri

vare

tr

ansa

ctio

n.

Ban

kru

pt

or

liqu

idat

ed

incl

ud

es

firm

s th

at

dec

lare

d

ban

kru

ptc

y o

r in

itia

ted

a

com

ple

te

liqu

idat

ion

o

f as

sels

. S

rill

trad

ed

incl

ud

es

firm

s th

at

rem

ain

ed

pu

blic

ly

trad

ed.

‘We

wer

e ab

le

to d

eter

min

e th

e st

atu

s o

f al

l o

f o

ur

sam

ple

ti

rms

at

the

end

o

f ea

ch

of

the

fou

r-ye

ar

per

iod

s.

I Ien

ce

lhe

tota

l n

um

ber

o

f lir

ms.

ac

;oss

all

ou

lco

mes

, is

720

. I l

ow

ever

, w

e w

ere

able

IO

ob

(ain

o

wn

ersh

ip

Dad

a fo

r o

nly

71

5 lir

ms.

T

his

m

eaS

ure

is

def

ined

as

th

e p

erce

nta

ge

of

ou

tsta

nd

ing

vo

les

con

tro

ttcd

b

y cr

ltic

crb

an

d

dir

ecto

rs,

thei

r fa

mily

m

emb

ers,

tr

ust

s fo

r Ih

cir

ben

dii,

an

d

corp

ora

lion

s o

r ti

mn

ttal

ion

s Ih

ey

con

lro

t,

as r

rpo

rlet

t in

lh

e ai

inu

al

nie

elin

g

t”-o

xy s

tale

mcn

l. ‘F

irm

va

lue

is t

he

sum

of

Ihe

bo

ok

valu

es

of

curr

ent

liab

itili

es,

ton

g-t

erm

d

ebI,

and

p

refe

rred

st

ock

p

lus

the

mar

ket

valu

e o

f co

mm

on

sl

ack.

B

oo

k va

lues

w

ere

ob

tain

ed

fro

m Moody's /rr

r/u

srri

d

Mur

rds

in

1973

, 19

78,

and

19

83.

Th

e m

arke

t va

lue

of

ou

tsta

nd

ing

sh

ares

is

cat

cuta

(ed

u

sin

g

shar

e p

r$e

at

the

end

o

f 19

73,

1978

, o

r I9

K3.

A

ll

tig

urc

s ar

e in

mill

ion

s an

d

hav

e b

een

co

nve

rted

IO

I98

3 d

olla

rs.

Th

e le

vera

ge

rati

o

is t

ota

l d

ebt

(th

e b

oo

k va

lue

of

lon

g-t

erm

d

ebt

plu

s cu

rren

t lia

bili

ties

) d

ivid

ed

by

the

sum

o

f to

tal

deb

t,

rhe

bo

ok

valu

e o

f p

refe

rred

st

ock

, an

d

the

mar

ket

valu

e o

f eq

uit

y.

Bal

ance

sh

erc

dat

a w

ere

colle

cted

fr

om

M

oo

dy’

s hc

krr~

id

Mu

rmu

ts.

“Un

aHit

iale

d

firm

s o

r in

div

idu

als

are

Iho

se

wit

ho

ut

rep

rese

nta

tio

n

on

th

e b

oar

d

of

dir

ecto

rs.

Blo

ckh

old

ing

s ar

e re

po

rted

in

th

e an

nu

al

mee

tin

g

prt

xy

stat

emen

ts.

Aft

itia

ted

fi

rms

are

tho

se

rep

rese

nte

d

by

a d

irec

tor

or

lop

o

ltic

er

on

th

e sa

mp

le

firm

’s

bo

ard

o

f d

irec

tors

. B

lock

ho

ldin

gs

are

rep

orl

ed

in

Ihe

ann

ual

m

eeti

ng

p

roxy

st

atem

ents

. ‘O

ther

b

lock

ho

lder

s in

clu

de

fin

anci

al

inst

itu

tio

ns,

fo

un

dat

ion

s,

esla

tes,

an

d

emp

loye

e st

ock

o

wn

ersh

ip

pla

ns.

B

lock

ho

ldin

gs

are

rep

orl

ed

in

lhe

ann

ual

m

relin

g

pro

xy

sta(

emen

ts.

Mu

llin

om

ial

log

il

reg

ress

ion

s o

n

the

inci

den

ce

of

ou

tco

mes

in

p

oo

led

sa

mp

les

of

240

intl

ust

ri;r

l H

rms

liste

d

on

th

e N

ew

Yo

rk

or

Am

cria

n

Sla

ck

Exc

han

ge

in 1

973,

19

78,

or

19X

3.“.

”

Ind

epen

den

t va

riab

les

Co

nsl

an

t

Per

cen

tag

e o

f vo

tes

con

tro

lled

b

y o

Hic

ers

and

d

irec

tors

’

Lo

g

(tir

m

valu

e)J

Lev

erag

e ra

lio”

.___

____

P

erce

nta

ge

of

vote

s o

wn

ed

by

Use

o

f u

naf

filia

ted

st

agg

ered

fi

rms

or

voti

ng

in

div

idu

als’

Per

cen

tag

e P

erce

nta

ge

of

voIe

s o

f vo

tes

ow

ned

b

y o

wn

ed

by

aHili

nte

d

oth

er

blo

ck-

firm

s’

ho

lder

s”

____

__

__

Dep

end

ent

vari

able

: lo

g [

pro

bab

ility

(a

cqu

ired

)/p

rob

abili

ty

(sti

ll tr

aded

)]

Co

eHic

ien

t -0

.12

0.06

-0

.12

- 0.

42

0.03

I.5

6 2.

26

I .I9

S

tan

dar

d

erro

r 0.

07

0.08

0.

07

0.47

0.

I3

2.1X

0.

66

1.7Y

p

-v;1

lue’

0.

00

KY

3 0.

08

0.37

0.

7Y

0.47

0.

00

(I.3

2

Dep

end

ent

vari

able

: lo

g (

pro

bab

ility

(w

ent

pri

vate

)/p

rob

abili

ty

(sti

ll tr

aded

)]

Co

ellic

ien

l -

3.65

3.

31

-0.1

I

I .40

-0

.13

-1

3.40

I

Sta

nd

ard

er

ror

2.54

t .

35

0.1

Y

1.13

0.

3s

- I .

44

- p

-val

ue’

0.

15

0.01

0.

54

0.22

0.

71

- 0.

02

-

~I

-..-

_

_

I,_

. . .

. . . . .

. . . _

. “_

. ..L

. . . . .

. . . . .

.._.

.._.._

__-.

. .

. ,

De

pe

nd

ttu

t va

riab

le:

log

[p

rob

ab

ility

(b

an

kru

pl

or

liqu

ida

ted

)/~

rob

ah

ility

(s

till

trad

ed)]

Co

elti

cien

t I h

o 0.

90

- 0.

79

6.15

0.

12

- 9.

05

2.4

1 I .7

1 S

tan

dar

d

erro

r 2.

52

I.23

0.22

1.

47

0.34

1 I

.06

1.45

4.

05

/I-v

;lll

le'

0.53

0.

47

0.00

0.

00

0.74

0.

4 I

0.10

0.

66

“Th

e o

rig

inal

sa

mp

le

was

sel

ecte

d

at r

and

om

fr

om

fi

rms

liste

d

on

a

nat

ion

al

exch

ang

e th

rou

gh

ou

t 10

72

and

in

clu

ded

in

M

ou

tly’

s /n

&rs

rric

rl

Mu

nn

ctf

in

1972

. E

ach

d

epar

ture

fr

om

th

e sa

mp

le

was

re

pla

ced

b

y an

in

du

stri

al

firm

th

at

was

in

itia

lly

liste

d

on

a

nat

ion

al

exch

ang

e o

n

a d

ate

as c

lose

as

p

oss

ible

to

th

e d

ate

the

dep

arti

ng

Ii

rm

was

del

iste

d.

Th

us

the

sam

ple

si

ze

rem

ain

s at

24

0 ev

ery

year

. D

ata

for

the

sam

ple

fi

rms

in

1973

, 19

78,

and

IV

83

are

po

ole

d.

“Ou

tco

mes

re

llect

ev

ents

th

at

occ

urr

ed

wit

hin

fo

ur

year

s o

f th

e m

easu

rem

ent

of

man

ager

ial

ow

ner

ship

o

f vo

tes.

A

cqu

ired

re

pre

sen

ts

firm

s ac

qu

ired

b

y an

oth

er

lirm

o

r p

arty

. W

en

l p

riva

te

rep

rese

nts

c

ou

th-0

1 ch

an

ge

s th

at

we

re

rep

ort

ed

ii

s il

go

ing

pri

vate

tr

ansa

ctio

n.

Ban

kru

pl

or

liqu

idat

ed

incl

ud

es

firm

s th

at

dec

lare

d

ban

kru

plc

y o

r in

itia

ted

;I

co

mp

lele

liq

uid

atio

n

of

asse

ts.

Still

tr

aded

in

clu

des

lir

ms

that

re

mai

ned

p

ub

licly

tr

aded

. “T

his

II

IC;I

SIII

'C is

de

linc

tl as

(h

e p

erce

nta

ge

of

ou

tsta

nd

ing

vo

les

con

tro

lled

b

y o

tlic

crs

and

d

irec

tors

, th

eir

fam

ily

mem

ber

s,

tru

sts

for

thei

r b

enel

il,

anA

l co

rpo

ralio

ns

or

fou

nd

alio

ns

they

co

nlr

ol,

as r

epo

rted

in

th

e ;~

nn

ual

mee

ling

p

roxy

sl

atem

enl.

Fir

m

valu

e is

th

e SI

IIII

ol'

th

e h

oo

k v

;du

es

of

cu

rre

nt

liab

ilitie

s,

lon

g-t

ern

1 d

eb

t.

an

d p

refe

rre

d

sto

ck

p

lus

the

mar

ket

valu

e o

f co

mm

on

sm

ck.

Bo

ok

valu

es

wer

e o

bta

ined

fr

om

M

oody

’s

Imhr

s~ic

rl

MW

IUN

/~ in

19

73,

197X

, a

nd

19

X3.

Th

e m

arke

t va

lue

of

ou

tsla

nd

ing

sh

ares

is

cal

cula

ted

u

sin

g

shar

e p

rice

at

th

e en

d

of

1973

, 11

78,

or

1183

. A

ll

ligu

res

are

in m

illio

ns

and

h

ave

bee

n

con

vert

ed

io

1983

d

olla

rs.

‘Th

e le

vera

ge

rati

o

is t

ota

l d

ebt

(th

e b

oo

k va

lue

of

lon

g-l

erm

d

ebt

plu

s cu

rrcn

l lia

hili

lies)

d

ivid

ed

by

the

sum

o

f to

tal

d&

l, th

e b

oo

k va

lue

01

pr:

ferr

ed

sto

ck,

and

th

e m

arke

t va

lue’

of

equ

ity.

B

alan

ce

shee

t d

ata

wer

e co

llect

ed

fro

m

Moo

dy’s

In

hsrr

iul

Mun

ds.

Un

allil

iate

d

lirm

s o

r in

div

idu

als

are

tho

se

wit

ho

ut

rep

rese

nta

tio

n

on

th

e h

oar

d

of

dir

ecto

rs.

Blo

ckh

old

ing

s ar

e re

po

rted

in

th

e an

nu

al

mee

tin

g

pro

xy

stat

emen

ts.

“Mili

aled

lir

ms

are

tho

se

rep

rese

nte

d

by

a d

irec

tor

or

top

o

ltic

er

on

th

e sa

mp

le

firm

’s

ho

ard

o

f d

irec

tors

. B

lock

ho

ldin

gs

are

rep

ort

ed

in

the

iln

;;u

al

mee

tin

g

pro

xy

stal

emrn

ts.

Oth

er

blo

ckh

old

ers

incl

ud

e lin

anci

al

insM

uti

on

s,

fou

nd

atio

ns,

es

tate

s,

and

em

plo

yee

sto

ck

ow

ner

ship

p

lan

s.

Blo

ckh

old

ing

s ar

e re

po

rted

in

th

e an

nu

al

nie

elin

y p

roxy

si

atem

ents

. ‘T

he

hyp

olh

esis

th

at

all

coet

tici

ents

o

f th

e m

uit

ino

mia

l lo

git

reg

ress

ion

e

qu

al

zero

is

re

jec

ted

at

th

e O

.OI

leve

l. Th

e

pse

ud

o

R2

stat

isti

c is

0.1

26.

‘No

fi

rms

that

W~

III

pri

vale

h

ad

a b

lock

ho

ldin

g

of

this

ty

pe.

W. H. Mikkelson and ,LI.M. Partch, Managers’ coring rights and corporate control

25%

20%

15%

10%

5 %

0 % I I 7- -1

0-10x 1 O-20% 20-30% 30-40% 40-50% so-75%

Percentage of Votes Controlled by Officers and Directors

ges of tirms acquired within categories defined by percentages of votes con- rs and directors. Acquisitions are completed in four-year periods that follow 1983. Observations come from pooled samples of 240 industrial firms listed on

the New York or American Stock Exchange.

Fig. 1. Perter ita trolled by offi se1 1973, 1978, ar Id

and highest (more than 50%) ranges of ownership the proportion of acquired firms is 0.17. The null hypothesis of no differences among the proportions of firms acquired over ranges of managers’ voting rights cannot be rejected at a significance level of 0.25. In addition, we estimate multinomial regressions that allow the coefficient on managers’ voting rights to vary across three intervals of these rights. The intervals we choose, based on the findings of Merck, Shleifer, and Vishny (1988a) and Wruck (19881, are (Y less than 0.05, CY greater than or equal to 0.05 and less than 0.25, and CY greater than or equal to 0.25. We find no significant coefficients for any of these intervals.

We also examine whether changes in managers’ voting rights over five-year periods are related to the frequency with which firms subsequently experi- ence certain outcomes. In a multinomial logit regression there is no relation between the change in managers’ voting rights and the proportion of firms that are acquired or remain traded at the end of the four years following the measurement of the ownership change. Twenty-four percent of firms with he largest increases in ownership (more than 0.10) and 23% of firms with the largest decreases in ownership (less than -0.10) are acquired.

W. W Mkkelson and MM Partch. Managers’ coring rights and corporate control 279

6.2. Initiation of control ecents

To this point the evidence shows no relation between completed control changes and managers’ control of votes. But this result conceals the effects of target managers’ voting control on the initiation as well as the success of takeover attempts. In this section we investigate the influence of managers’ holdings of votes on the incidence of takeover attempts and toehold invest- ments.

We first document how often firms in our sample are the target of a block purchase, a merger proposal or tender offer, or an attempt to go private. These events are identified by searching the Wall Street Journal Index for each firm in our sample. 5 Then we relate the incidence of these events to managers’ voting rights, firm value, leverage, staggered voting, and the presence of outside blockholders. To be included in our analysis, a control event must have occurred within the four years following the date of the proxy statement from which one of our measurements of managers’ control of voting rights was taken.

The frequency of control events increased over the successive four-year periods that follow our measurements of managers’ shareholdings in 1973, 1978, and 1983. There were seven reported purchases of large blocks in 1973-1977, 54 in 1978-1982, and 52 m 1983-1987, for a total of 113. We identified 29 merger proposals or tender offers in 1973-1977,47 in 1978-1982, and 51 in 1983-1987, for a total of 127. Thus, the percentage of firms that were the target of a merger proposal or tender offer increased from 12.1% in the four years following 1973 to 21.3% in the four years following 1983. Finally, we found two attempts to take firms private in 1973-1977, seven in 1978-1982, and 15 in 1983-1988, for a total of 24.

In table 5 we present four binary logit regressions that correspond to four events: the purchase of a large block of common stock, a merger proposal or tender offer, target managers’ resistance to a takeover attempt, and an attempt to take the firm private. In each regression the dependent variable corresponds to the occurrence of the event in the four years following our measurement of managers’ voting rights. The independent variables are measured at the beginning of the four-year periods.

The first logit regression shows a negative and significant (at the 0.01 level) relation between block purchases and the proportion of votes controlled by officers and directors. This is consistent with the idea that outsiders perceive greater potential for an increase in firm value, as well as a greater probability

‘The Wail &reef Journal is selective in reporting 13d filings or toehold investments. For example, for 1978 through 1980, Mikkelson and Ruback (1985) find that only 63% of 13d filings by nationally listed firms were reported in the WaN Street Journal. Consequently, we document only a subsample of all accumulations of blockholdings for our firms.

Tab

le

5

Mu

hin

om

ial

loai

l re

eres

sio

ns

on

th

e in

cid

ence

o

f co

ntr

ol

even

ts

in n

oo

led

sa

mn

les

of

240

ind

ust

rial

lir

ms

liste

d

on

th

e N

ew

Yo

rk

or

Am

eric

an

Sto

ck

Exc

han

ge’

in

lY73

, 19

?8,

or

1983

.”

- Ind

epen

den

t va

riab

les

Co

nst

ant

Per

cen

tag

e o

f vo

tes

con

tro

lled

b

y o

ftic

ers

and

d

irec

tors

h

Lo

g

(fir

m

valu

e)’

-

Per

cen

tag

e o

f P

erce

nta

ge

vole

s o

wn

ed

by

of

vole

s U

se

of

un

affi

liate

d

ow

ned

b

y L

ever

a e

stag

ger

ed

firm

s o

r af

filia

led

ra

tio

J vo

tin

g

ind

ivid

ual

s’

firm

s’

Per

cen

lag

e o

f vo

les

ow

ned

b

y o

ther

b

lock

- h

old

ers”

Dep

end

ent

vari

able

: lo

g [

pro

bab

ility

(p

urc

has

e o

f a

larg

e b

lock

o

f st

ock

)/p

rob

abili

ty

(no

p

urc

has

e)]

Sam

ple

si

ze:

711

Co

effi

cien

t -0

.16

- 3.

53

-0.1

3 1.

06

-0.1

2 -

1.23

-

1.x2

S

tan

dar

d

erro

r 1.

12

0.95

0.

08

0.55

0.

13

2.65

I.0

4 p

-val

ue

h

0.89

0.

00

0.09

0.

05

0.36

0.

64

0.08

__

~~_.

____

_

Dep

end

ent

vari

able

:%g

[p

rob

abili

ty

(mer

ger

p

rop

osa

l o

r te

nd

er

otf

er)/

pro

bab

ility

(n

o

off

er)]

S

amp

le

size

: 71

I

Co

effi

cien

t 0.

Y8

- I .

27

-0.1

9 -

0.22

0.

10

- I .

39

- 0.

08

Sta

nd

ard

er

ror

0.05

0.

6X

0.07

0.

46

0.13

2.

48

0.73

p

-val

ue”

0.

30

0.06

0.

01

0.63

0.

42

0.58

0.

‘) I

-

- 1.

15

2.03

0.

57

0.00

I .

72

0.73

Dep

end

ent

vari

able

: lo

g [

pro

bab

ility

(r

esis

tan

ce

to o

ffer

)/p

roh

ahili

ty

(no

re

sist

ance

)]

Sam

ple

si

ze:

115

Co

eRic

ien

I -

5.30

-

6.04

0.

34

0.20

0.

49

7.44

-7

.14

2.78

Sta

nd

ard

er

ror

2.77

2.

79

0.20

1.

51

0.35

6.

20

6.01

4.

96

p-v

alu

e h

0.

06

0.03

0.

08

0.89

0.

17

0.23

0.

23

0.5x

Dep

end

ent

vari

able

: lo

g (

pro

bab

ility

(a

ttem

pt

to t

ake

firm

p

riva

te)/

pro

bab

ility

(n

o

atte

mp

t)]

Sam

ple

si

ze:

711

Co

effi

cien

t -6

.38

2.90

0.

11

1.74

-0

.01

- 7.

22

1.20

-

9.73

Sta

nd

ard

er

ror

2.30

1.

18

0.16

0.

98

0.29

10

.16

1.46

II.

68

p-v

alu

e”

0.01

0.

01

0.47

0.

08

0.97

0.

48

0.4

I 0.

40

“Th

e o

rig

inal

sa

mp

le

was

sel

ecte

d

at r

and

om

fr

om

fi

rms

liste

d o

n a

nat

ion

al

exch

ang

e th

rou

gh

ou

t 19

72 a

nd

in

clu

ded

in

M

M/~

‘S

I~rc

lus~

icrl

M~c

tcrl

in

19

72.

Eac

h

dep

artu

re

fro

m

the

sam

ple

w

as

rep

lace

d

by

an

ind

ust

rial

li

rm

that

w

as

init

ially

lis

ted

o

n

a n

atio

nal

ex

chan

ge

on

:I

dat

e as

clo

se

as

po

ssib

le

to t

he

dat

e th

e d

epar

tin

g

lirm

w

as d

elis

ted

. T

hu

s th

e sa

mp

le

size

re

mai

ns

at

240

ever

y ye

ar.

Dat

a fo

r th

e sa

mp

le

firm

s in

19

73,

1978

, an

d

1983

ar

e p

oo

led

. “T

his

m

easu

re

is d

elin

ed

as

the

per

cen

tag

e o

f o

uts

tan

din

g

vote

s co

ntr

olle

d

by

olii

cers

an

d

dir

ecto

rs,

thei

r fa

mily

m

emb

ers,

tr

ust

s fo

r th

eir

ben

elil,

an

d

corp

ora

tio

ns

or

fou

nd

atio

ns

they

co

ntr

ol,

us

rep

ort

ed

in t

he

ann

ual

m

eeti

ng

p

roxy

st

atem

ent.

‘F

irm

va

lur

is t

he

sum

of

the

bo

ok

valu

es

of

curr

ent

li;lb

iliti

es,

lon

g-t

erm

d

ebt,

an

d

pre

ferr

ed

sto

ck

plu

s th

e m

arke

t va

lue

of

com

mo

n

sto

ck.

Bo

ok

valu

es

wer

e o

bta

ined

fr

om

M~

xly

‘s /

tr~/

~ts/

rirr

/ M

tr~r

~rrr

ls in

19

73,

1978

, an

d

19X

3.

Th

e m

arke

t va

lue

of

ou

tsta

nd

ing

sh

ares

is

ca

lcu

lutr

d

usi

ng

A

are

pri

ce

at

the

end

o

f 10

73,

1978

, o

r 19

83.

All

fi

g&

s ar

e in

mill

ion

s an

d

hav

e b

een

co

nve

rted

to

I9

83

do

llars

. “T

he

leve

rag

e ra

tio

is

to

tal

deh

t (t

he

bo

ok

valu

e o

f lo

ng

-ter

m

deh

t p

lus

curr

ent

liab

iliti

es)

div

ided

b

y th

e su

m

of

tota

l d

ebt,

th

e b

oo

k va

lue

of

pre

ferr

ed

sto

ck,

and

th

e m

arke

t va

lue

of

equ

ity.

B

alan

ce

shce

~ d

ata

wer

e co

llect

ed

fro

m

Mo

url

y’s

Incl

usr

ritr

l M

utn

rctl

s.

‘Un

ntf

iliaf

ed

firm

s o

r in

div

idu

als

are

tho

se

wit

ho

ut

rep

rese

nta

tio

n

on

th

e b

oar

d

of

dir

ecto

rs.

Blo

ckh

old

ing

s ar

e re

po

rted

in

th

e an

nu

al

mee

tin

g

pro

xy

stilt

etlle

ills.

‘Alli

liute

d

lirm

s ar

e th

ose

re

pre

sen

ted

b

y ;I

dir

ecto

r o

r to

p o

llice

r on

th

e s;

rmp

le l

irm

’s

bo

ard

o

f d

irec

tors

. I~

lock

ho

ldin

gs

are

rep

ort

ed

in t

he

an

nu

al

mee

tin

g

pro

xy

stat

emen

ts.

‘Oth

er

hlo

ckh

old

ers

incl

ud

e fi

nan

cial

in

stit

uti

on

s,

fou

nd

atio

ns,

es

tate

s,

and

em

plo

yee

sto

ck

ow

ner

ship

p

lan

s.

Blo

ckh

old

ing

s ar

e re

po

rted

in

th

e ill

l,fU

Ul

mee

tin

g

pro

xy

stat

emen

ts.

Th

e h

ypo

thes

is

that

al

l co

effi

cien

ts

ecpa

l ze

ro

is r

ejec

ted

a~

th

e 0.

01

leve

l fo

r ea

ch

of

the

fou

r b

ino

mia

l lo

git

re

gre

ssio

ns.

F

or

reg

ress

ion

s I,

2, 3

, an

d

4 th

e p

seu

do

I<

* s!

atis

tics

ar

e 0.

203,

0.

071,

0.

261,

an

d

0.10

4.

282 W.H. Mkkelson and M.M. Panch, Managers’ toting rights and corporare control

of a successful takeover, when the target managers’ proportionate control of shares is low.

The second logit regression indicates that the incidence of merger propos- als or tender offers is also inversely related to managers’ voting rights. The relation is significant at the 0.06 level. Firm size is also significantly negatively related to the incidence of acquisition proposals. Leverage, the presence of outside blockholders, and the use of staggered voting do not affect the incidence of merger proposals and tender offers.

Our evidence suggests that outsiders are more likely to pursue acquisitions of firms whose officers and directors control relatively few votes. One explanation, consistent with Stulz (19881, is that firms with low managerial ownership can be acquired at lower cost because managers are less able to block a takeover attempt. A second explanation, consistent with Jensen and Meckling (1976), is that firms with low managerial ownership have greater incentive problems between managers and other stockholders and present greater opportunities for increases in value.

Twenty-four of the 127 takeover offers were reported by the Wall Street Journal to have been resisted by the target firm’s manager. We define resistance as ranging from a simple statement of opposition to a change in the firm’s assets or financial claims designed to thwart the transfer of control. The third logit regression in table 5 shows that publicly reported resistance to takeover attempts is more likely when managerial control of votes is low. consistent with Walkling and Long (1984), or when the firm is large.

When managers’ ownership is small, accumulation of a block or a takeover attempt by an outsider is more likely, and so is resistance by the target managers. Apparently, the higher expected costs to outsiders due to resis- tance are not large enough to offset the greater expected takeover gains. Managers with lower stockholdings are more likely to resist a takeover because they have less to lose if the takeover does not occur.

6.3. Outcomes of takeocer attempts

In table 6, we report multinomial logit regressions on the outcomes of the sample of 127 takeover attempts. There are three possible outcomes: the original bidder is successful, another bidder is successful, and no offer is successful, which is the default outcome in the logit regression. Like Broadman (19891, we find that managers’ ownership is positively related to the likelihood that the original bidder will be successful. The coefficient, however, is significant only at the 0.12 level. Greater voting control by managers increases the probability that they will accept an offer by the original bidder. Our evidence, consistent with the results of Walkhng and Long (19841, Merck, Shleifer, and Vishny (1988a), and Broadman (1989), suggests that the cash-flow claims of managers’ shareholdings give target

W W Mikkelson and M.&t, Partch. Managers’ rating rights and corporare control

Tab

le

1

Ave

rag

e im

plie

d

pro

bab

iliti

es

of

con

tro

l ev

ents

d

eriv

ed

fro

m

log

it

reg

ress

ion

s es

tim

ated

fo

r p

oo

led

sa

mp

les

of

240

ind

ust

rial

fi

rms

liste

d

on

th

e N

ew

Yo

rk

or

Am

eric

an

Sto

ck

Exc

han

ge

in

1Y73

, lY

78,

or

l’JX

3.

Ob

serv

atio

ns

are

gro

up

ed

by

per

cen

tag

e o

f vo

tes

con

tro

lled

b

y o

llice

rs

and

d

irec

tors

(p

anel

A

) an

d

by

tota

l fi

rm v

alu

e (p

anel

13

).“.

h

Per

cen

tag

e o

f vo

tes

con

tro

lled

b

y o

tlic

ers

and

d

irec

tors

((

I)’

Mer

ger

p

rop

osa

l o

r te

nd

er

off

er

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286 W.H. Mikkelson and M.M. Partch. Managers’ toting rights and corporate control

managers important incentives that affect the outcomes of takeovers. We do not find support for the argument that greater managerial voting power reduces the probability that takeover attempts will succeed.

For the subsample of resisted takeover attempts and the subsample of unresisted attempts (not reported) the coefficients on managers’ ownership are also positive, but statistically insignificant. We find an insignificant negative association between managers’ voting rights and the likelihood that another bidder’s offer will succeed for the entire sample of takeover attempts as well as for the subsample of resisted offers and the subsample of unre- sisted offers.

Panel A of table 7 presents the average implied probabilities of the occurrence of different types of control events in four-year periods. The events are (1) a takeover attempt, (2) a takeover attempt that leads to a control change, (3) a resisted takeover attempt that leads to a control change, and (4) an unresisted takeover attempt that leads to a control change. Using the estimated logit regressions, we solve for the implied probability of each observation of an event, such as a merger or tender offer. The average probabilities indicate the likelihood of a particular event for a firm with characteristics similar to firms in subsamples grouped by intervals of man- agers’ voting rights.

From the lowest to the highest ranges of manager’ ownership, the average implied probabilities of a merger proposal or tender offer decrease from 0.16 to 0.12. Thus, even though the logit regression uncovers a statistically significant association, the implied effect of managers’ ownership on the probability of a takeover offer is not large.

Column 2 of table 7 shows the average implied probabilities that a takeover offer will lead to a successful takeover by either the original bidder or another bidder. The average probability of a successful offer increases monotonically from 0.77 when managers control fewer than 10% of votes to 0.91 when managers control more than 50% of votes.

The absence of a relation between managers’ holdings of votes and control changes apparently is explained by the combination of the probabilities of takeover attempts in column 1 and the probabilities of successful attempts in column 2. As managers’ ownership increases, a decreased probability of takeover attempts is offset by an increased success rate of control changes. The products of the probabilities in columns 1 and 2 are estimates of the joint probability of receiving a takeover offer that leads to a control change. The products of the probabilities are virtually constant across ranges of managers’ control. The joint probability ranges from 0.12 when managers control fewer than 10% of votes to 0.14 when managers control between 20% and 30% of votes, and is 0.11 when managers control more than 50% of the votes. Thus, the bundling of residual claims and votes in common stock that is emphasized by Fama and Jensen (1983) and by Easterbrook and Fischel

W. W ,Mikkelson and MM. Partch, Managers’ roting rights and corporate control 287

(1983) leads to no reliable relation between managers’ ownership stakes and the incidence of control changes.

The average implied probabilities in columns 3 and 4 indicate that as managers’ ownership increases, so does the probability that both resisted and unresisted takeover attempts will lead to a control change. Because the probability that unresisted attempts will lead to a control change increases with managers’ control of votes, managers’ resistance does not explain the positive relation between their ownership and the likelihood that takeover attempts will result in a control change.

Panel B of table 7 groups merger proposals and tender offers by quartiles of the total value of the target firm. In column 1 the average implied probability of merger proposals and tender offers decreases from 0.19 for the smallest firms to 0.12 for the largest. In addition, in column 2 the frequency of takeover offers that result in a control change decreases as firms increase in size. These effects reinforce each other, so that there is a negative relation between firm size and the occurrence of completed acquisitions, as shown earlier.

7. Conclusions

We document voting stakes of officers and directors of nationally listed U.S. industrial firms in 1973, 1978, and 1983. On average managers as a group control a substantial voting stake. The median and mean percentages of votes controlled by managers are 13.9% and 19.6%. Officers and directors own less than 10% of the votes in 42% of our observations; this group owns at least 50% of votes in 9% of the observations.

There is considerable variation in managers’ voting stakes across firms, but little variation over time for most firms. The absolute value of the change over five-year intervals in the proportion of votes controlled by officers and directors is less than 10% of outstanding votes for approximately 85% of our observations.

We investigate the incidence of events in the market for corporate control. Larger firms are less likely to receive takeover offers as well as to undergo a change in control. But staggered voting for directors, financial leverage, and the holdings of blockholders without board representation are not signifi- cantly related to either the frequency of takeover attempts or the frequency of control changes. Firms that have a blockholder with board representation are more likely to be acquired.

Completed acquisitions of firms are unrelated to managers’ voting control. But this lack of association masks the effects of managers’ voting control on outsiders’ attempts to acquire control and on the outcome of takeover attempts. We find that accumulations of blockholdings and attempts to acquire control are more likely when the target firm’s managers control few

288 W. H. MiWtelson and M.M. Partch. Managers’ toting rights and corporate control

votes. In other words, firms with low ownership by managers are more likely to be the target of a control event, but they are not more likely to experience a takeover attempt that leads to a change in control. The link between these findings is a positive relation between managers’ voting control of a target firm and the probability that a takeover offer will lead to a control change.

We argue that the positive relation between the incidence of attempts that lead to a control change and managers’ voting control is not explained by the more frequent resistance to takeover attempts by managers with less control. We base our argument on evidence that for unresisted offers the probability of a subsequent control change is greater as managers’ voting control increases. One explanation is that outsiders make more lucrative offers when target managers’ voting control is high. Another explanation is that target managers are more likely to accept a particular offer, publicly resisted or not, when their ownership stake in the firm and personal payoffs from a takeover are high.

Appendix

Table A. 1

Measures of ownership of votes by officers and directors for deciles defined by the market value of common stock for pooled samples of 240 industrial firms listed on the New York or American

Stock Exchange in 1973, 1978 or 1983.a

Deciles of Range of market market value value of equity b of equity (millions)

2

3

4

5

6

8

$1.0 to $10.5

10.5 to 17.4

17.4 to 27.5

28.1 to 52.4

53.0 to 86.1

86.2 to 151.1

154.8 to 305.4

309.3 to 672.0

Mean (median; standard deviation)

percentage of votes controlled

by officers and directorsC

34.0% (32.0%; 22.6%)

27.2 (23.0; 19.4)

29.4 (28.4; 20.0)

25.3 (25.5; 18.0)

21.4 (17.0; 17.9)

18.5 (17.1; 15.5)

14.9 (6.6; 17.8)

13.5 (4.5; 17.8)

Mean (median; standard deviation)

percentage of votes controlled by holders of the

top three officesd

23.5% (19.1%; 18.9%)

17.2 (11.7; 15.8)

18.4 (13.6; 18.1)

16.2 (12.8; 15.0)

14.0 (12.5; 15.2)

9.9 (6.6; 10.9)

7.6 (1.5; 11.9)

8.2 (0.8; 14.8)

W W. Mikkelson and M.M. Partch, ‘Managers’ coring rights and corporate control 289

Table A.1 (continued)

Mean (median; Mean (median; standard deviation)

standard deviation) percentage of percentage of votes controlled

Deciles of Range of market votes controlled market value value of equity’

by holders of the by officers top three

of equity (millions) and directorsC officesd

9 672.8 to 1858.7 6.4 (3.2; 9.5) (0.:;9.6)

10 1882.8 to 78896.4 5.4 (0.9: 10.8) cO.:;:.8J

aThe original sample was selected at random from firms listed on a national exchange throughout 1972 and included in Moody’s Industrial Manual in 1972. Each departure from the sample was replaced by an industrial firm that was initially listed on a national exchange on a date as close as possible to the date the departing firm was delisted. Thus the sample size remains at 240 every year. Data for the sample firms in 1973, 1978. and 1983 are pooled.

bThe market value of outstanding shares is calculated using share price at the end of 1973, 1978, or 1983. All figures are in millions and have been converted to 1983 dollars.

‘This measure is defined as the percentage of outstanding votes controlled by officers and directors, their family members, trusts for their benefit, and corporations or foundations they control, as reported in the annual meeting proxy statement.

dThe top three offices are the chief executive, president, and chairman of the board.

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290 W. H. Mikkelson and M. M. Partch. Managers’ toting rights and corporate control

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