proxy fight and cash holding

Faleye (2004, p. 2041):

 I focus on the takeover-deterrence effects of corporate liquidity and suggest the proxy contest as an effective alternative control mechanism.

Excess cash enhances the ability of a hostile target to defend itself against an unwanted bid. Such defenses include repurchasing stock, acquiring a competitor of the bidder and filing private antitrust litigation, or turning around to acquire the suitor itself (Bagwell (1991), Stulz (1988), and Dann and DeAngelo (1988)). In addition, excess cash increases the bidder’s uncertainty about the value of the target since it can be used to engage in bidder-specific negative net present value activities. Thus, holding excess cash may serve as a deterrent to would-be bidders.

Faleye (2004, p. 2043):

When dissidents wage a proxy contest, they are not just concerned about the overall picture (as reflected in, say, stock performance or earnings), but also about particular issues relating to management’s control of the firm. Finally, it provides additional evidence on the efficiency of the corporation as an economic institution. Although management is largely free to act without interference from shareholders and is able to employ various devices to protect its interests, the extent to which it can engage in non-value-enhancing activities is limited by control mechanisms such as the proxy contest.

Faleye (2004, p. 2044):

This paper suggests the proxy contest as an effective alternative for addressing the agency problems of excess cash. By definition, a proxy fight is a hostile control activity. This implies that management will deploy all available defenses when faced with one. In spite of this, there are several reasons why we might expect excess cash firms to be targeted in proxy contests. These reasons revolve around the fact that the extra defenses a cash-rich firm may employ against a hostile bidder are largely ineffective against dissident shareholders waging a proxy fight. In this regard, it is important to distinguish between a plain proxy fight and one conducted jointly with a takeover bid. Apart from being inherently more expensive, a joint takeover bid/proxy fight makes dissidents susceptible to the anti-takeover defenses at management’s disposal. For example, the tactic of repurchasing stock is shown to be a strong deterrence for unwanted acquisition bids. However, it cannot discourage a plain proxy contest intended to force management to disgorge excess cash. This is because dissident shareholders in this case would be satisfied to see management repurchase stock in response to a proxy fight.1 Indeed, dissidents often demand a stock repurchase when their main complaint against incumbent management is excessive corporate liquidity.

Faleye (2004, p. 2041):