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Anti-Takeover Provisions and Investment Timing

We show how directors can set the strength of a firm's anti-takeover provisions in order to influence the investment-timing decision of a future empire-building CEO. The prospect of future hostile takeover attempts, which terminate the CEO's control benefits if successful, affects the CEO's willingness to invest in low-value projects. If anti-takeover defenses are too strong then the market for corporate control imposes insufficient discipline on the CEO, who invests too soon. If they are too weak then shareholders incur too many costs due to managerial distraction and the CEO invests too late. Anti-takeover defenses need to be stronger if the target firm's shareholders receive a larger proportion of any increase in firm value caused by a change in management.