Wednesday, October 31, 2012
Early corporate law scholarship argued both that anti-takeover devices are inefficient (they reduce the value of the firm) and that firms adopt efficient governance terms before they make their initial public offering. However, subsequent research revealed that most firms adopt anti-takeover devices before their initial public offering. Prior scholars offer explanations for this puzzle, but they fail to consider incentives created by the tax code. If the government taxes the pecuniary benefits of ownership (income, capital appreciation, etc.) more effectively than the non-pecuniary benefits of control (psychic pleasure from control, etc.), the tax code will cause the manager to retain too much control. This essay discusses corrective measures that the government could adopt including the taxation of anti-takeover devices. Unfortunately, these corrective measures would create their own distortions, and the current system may be second best. If we do not take corrective action, we should recognize the distortion of corporate control as an additional cost of taxation.