The external discipline of corporate control activities (takeovers) and the internal discipline imposed by corporate boards are two ways in which agency costs can be controlled in firms. State anti-takeover laws (ATLs) reduce the probability of takeovers. Therefore, ATLs diminish one of the two (agency cost) control mechanisms available to firms. The question that arises in this context is whether firms subject to ATLs take steps to bolster the remaining control mechanism, namely the board of directors. In this study, we analyze the effects of ATLs in Ohio and Pennsylvania. We assess board composition changes following passage of ATLs in these states. Thus, we test the substitution hypothesis of FAMA and Jensen (1983a and 1983b). Specifically, we test whether or not Ohio and Pennsylvania firms increased outsider representation following passage of ATLs. We extend the literature on ATLs focuses on shareholder losses on the announcement of ATLs and the reduction of the probability of takeovers following ATLs. We contribute to the literature testing the substitution hypothesis that has, thus far, produced mixed results. Finally, we address the critical issue of whether or not board composition is a tractable tool in the quest for shareholder value.

Publication Date



Note: imported from RIT’s Digital Media Library running on DSpace to RIT Scholar Works in February 2014.

Document Type


Department, Program, or Center

Accounting (SCB)


RIT – Main Campus