This paper examines the market reactions to toehold acquisitions to determine whether
and under what circumstances the formation of a new large outside shareholder
contributes to the shareholder value of the firm. We argue that although toehold
acquisitions signal imminent challenges to the control of the management of the target
firms, the challenges do not necessarily contribute to the shareholder value if the
management is likely to resist ferociously. We find that while voting premium increases
in response to toehold acquisitions for the entire sample, it depends on firm
characteristics such as dual class stocks and the asset size whether shareholder value
increases. Dual class targets exhibit a positive market reaction only if the controlling
shareholders do not have sufficient corporate resources under their control, whereas
single class targets show a significantly positive cumulative abnormal return regardless
of the asset size. The results are consistent with the hypothesis that dual-class stocks are
an outcome of the managerial incentives for entrenchment.
Keywords: event study; toehold acquisitions; agency theory; entrenchment; voting
premium; control transfer; managerial resistance; dual-class stocks; preferred stocks