We investigate why governance reforms do not necessarily improve economic outcomes. We argue that firms strategically change corporate policy when reform exposes them to potential takeover threats. Firms distribute cash dividends more and more often, when insiders have high ownership and their incentives are closely aligned with those of outsides. Firms repurchase shares more and more often as share repurchases deter potential takeovers, when insiders with low control rights are vulnerable to takeover threats. These results imply that firms strategically engage in corporate payout policy as a preemptive defensive measure to protect insiders in response to minority shareholder-oriented governance reform.
Key words: corporate governance reform, corporate strategic reaction, ownership control structure, takeover threats, preemptive defensive strategy, cash dividends, share repurchases
