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Antigreenmail charter amendments and shareholders’ wealth

University of British Columbia

From time to time, firms do repurchase their shares. An open market repurchase or a general tender offer does not have the effect of transfering wealth from one group of shareholders to another. This is in contrast to a privately negotiated premium repurchase from a single block holder where the remaining shareholders are excluded from participating in the offer. This type of targeted share repurchasing has been observed before - or in connection with - a takeover attempt and often has the effect of terminating the takeover attempt. Such a targeted share repurchase is commonly referred to as "greenmail". The price is usually at a premium over the prevailing market price and the seller will typically agree to abstain from acquiring any more of the company's voting stock. The non-participating shareholders stand to lose from both the premium paid out of corporate assets and the loss of a potential takeover offer premium. Recently, firms have been proposing to institute antigreenmail charter amendments that would prevent management from engaging in greenmail. Such a proposal may or may not be in the best interest of shareholders. This paper attempts to measure the economic significance of an antigreenmail proposal. The methodology chosen is that of an event-time study. The magnitude of abnormal returns is used to gauge its significance in relation to the day that the market learns of the antigreenmail charter amendment. The "stockholder interest hypothesis" predicts that the proposal is undertaken with the interest of shareholders in mind and thus stock prices should react positively to the announcement. However, the results obtained do not support that hypothesis. Stockholders seem to suffer a statistically significant decline in the value of their shares around the day when news of such proposals reach the market. This result is also inconsistent with previous empirical evidence on targeted repurchases and standstill agreements.

Text

2010-06-14

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http://hdl.handle.net/2429/25689

Business Administration

University of British Columbia

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