WITH GREATER POWER COMES GREATER RESPONSIBILITY? TAKEOVER PROTECTION AND CORPORATE ATTENTION TO STAKEHOLDERS

Using takeover protection as an indicator of corporate governance, this study examines how an exogenous shift in power from shareholders to managers affects corporate attention to non-shareholding stakeholders. Two competing hypotheses are entertained. The shareholder view predicts that stronger takeover protection will lead to a decrease in corporate attention to shareholders and non-shareholding stakeholders alike, as managers divert resources from shareholders to the pursuit of their private interests. The stakeholder view, in contrast, predicts that stronger takeover protection will increase corporate attention to non-shareholding stakeholders. Because catering to non-shareholding stakeholders contributes to the long-term value of the firm, managers will be more likely to attend to those stakeholders when relieved from short-termism triggered by the threat of hostile takeovers. Using a sample of 878 U.S. firms front 1991 to 2002, the study finds that an exogenous increase in takeover Protection leads to higher corporate attention to community and the natural environment, but has no impact on corporate attention to employees, minorities, and customers. Additional analyses show that firms that increase their attention to stakeholders experience at increase in long-term shareholder value. These findings provide additional evidence that relief front short-termism is a likely source of the increase in corporate attention to non-shareholding stakeholders following the increase in takeover protection. Copyright (C) 2008 John Wiley & Sons, Ltd.