The market for corporate control, often referred to as the takeover market, is subject to scientific research since many years.
This paper starts with Manne‘s (1965) initial essay on the topic, introduce the theory of the market for corporate control. Therefore, it will begin with a definition of the terms “corporate control” and “the market for corporate control”. Following this, it will explain the possibilities of taking over the control of a corporation. Subsequently, it will argue why the market for corporate control is of great importance. Afterwards, a synopsis on the current empirical evidence of its efficiency follows. Finally, the author takes a look on the welfare effects of the market for corporate control, before concluding on its applicability and having a look on solutions to correct the imperfections of the model.
Table of Contents
1. Introduction
2. The Market for Corporate Control – A definition
2.1. Corporate Control
2.2. The Market for Corporate Control
3. Why are takeovers needed?
3.1. The failure of internal controls
3.2. Hostile takeovers as disciplining devices
4. Taking over corporate control
4.1. Three takeover devices for the acquirer
4.1.1. Proxy Fight
4.1.2. Direct Purchase
4.1.3. Merger
4.1.4. Summary
4.2. Defense devices for the incumbents
5. Corporate Control takeover motives
5.1. Managerial efficiency hypothesis / Creation of market power hypothesis
5.2. Hubris hypothesis and the egoistic, overpaying manager
6. The welfare effects of corporate takeovers
6.1. Costs of a corporate takeover
7. Discussion: Does the market for corporate control work?
7.1. Solving problems of takeovers
8. Conclusion
Objectives and Topics
This paper explores the theoretical foundations and empirical evidence of the market for corporate control, examining how takeovers serve as a disciplining mechanism for inefficient corporate management and how they influence shareholder value.
- The role of the market for corporate control in addressing agency problems.
- Mechanisms and strategies for executing corporate takeovers.
- Defensive strategies employed by incumbent management.
- Motives for takeovers, including efficiency, market power, and managerial hubris.
- Evaluation of welfare effects and the overall efficacy of the takeover market.
Excerpt from the book
3.1. The failure of internal controls
“Much corporate behavior seems best understood in terms of managers running the show largely as they please.” (Shleifer & Vishny, 1988, p. 7)
Managers, as everyone else, have many different personal goals and ambitions that they pursue. One of those goals might be the desire to act in the interest of their shareholders, but apart from that, managers might as well desire a fortune, fame, praise, a relaxed life or something completely different. The way managers actually manage their companies is heavily influenced by their personal goals and ambitions. Shareholders, as being financiers only to the company, not actively managing it, do not have multiple goals and ambitions, but solely care about getting rich from the stock they own. (cf. Shleifer & Vishny, 1988, p. 7)
These different goals of managers and shareholders lead to agency problems within corporations and necessarily to conflicts whenever shareholders discover this behavior. That the separation of ownership and control within corporations leads to agency problems is a phenomenon that was originally discovered by Berle and Means (1982) already in 1932. Since then, shareholders have different aids to ensure that their managers act according to their interest. However, as Shleifer and Vishny (1988, p. 7) find: “Much corporate behavior seems best understood in terms of managers running the show largely as they please.”
Summary of Chapters
1. Introduction: Presents the agency problem resulting from the separation of ownership and control and outlines the paper's focus on the market for corporate control.
2. The Market for Corporate Control – A definition: Defines corporate control as the power to direct corporate resources and the market for control as an arena where managerial teams compete.
3. Why are takeovers needed?: Explores the failure of internal governance mechanisms and frames hostile takeovers as a necessary disciplining device for managers.
4. Taking over corporate control: Analyzes the methods of proxy fights, direct purchases, and mergers, while discussing the defensive maneuvers incumbents use to prevent displacement.
5. Corporate Control takeover motives: Examines competing theories including the managerial efficiency hypothesis, the creation of market power, and the hubris hypothesis.
6. The welfare effects of corporate takeovers: Investigates the sources of gains and the substantial costs associated with takeovers, including social impacts like job losses.
7. Discussion: Does the market for corporate control work?: Critically evaluates the effectiveness of the takeover market through empirical studies and considers potential solutions to its shortcomings.
8. Conclusion: Summarizes the findings that while the market for corporate control is an essential concept, its practical application is complex and remains imperfect.
Keywords
Corporate Control, Takeover Market, Agency Problems, Shareholders, Management, Proxy Fight, Merger, Corporate Governance, Managerial Efficiency, Hubris Hypothesis, Tender Offer, Welfare Effects, Stock Performance, Hostile Takeover, Inefficiency.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the theory and empirical evidence behind the "market for corporate control," specifically focusing on how takeovers act as a mechanism to address management inefficiencies and agency conflicts.
What are the central themes discussed?
The themes include the separation of ownership and control, the mechanisms and motivations behind corporate takeovers, defensive tactics by target firms, and the welfare consequences of M&A activity.
What is the main objective of the research?
The main goal is to introduce the theory of the market for corporate control and review whether it effectively disciplines managers to maximize shareholder value.
Which scientific methods are utilized?
The paper employs a comprehensive review of seminal literature, theoretical frameworks, and empirical studies—such as those by Jensen & Ruback, Manne, and Shleifer & Vishny—to evaluate the takeover market.
What is covered in the main body of the text?
The main body details the definition of corporate control, the failure of internal governance, specific takeover devices (proxy fights, purchases, mergers), takeover motives, and an empirical analysis of success rates.
How would you characterize this paper with keywords?
Key terms include Corporate Control, Takeover Market, Agency Problems, Corporate Governance, Managerial Efficiency, and Hubris Hypothesis.
What is the "hubris hypothesis" in the context of this work?
It is the theory that bidding managers often overpay for acquisitions because they overestimate the value of the target firm, which often leads to negative returns for the acquiring shareholders.
What is the "inefficiency threshold" mentioned in relation to takeovers?
It refers to the required capital gain of 10 to 25% from a takeover, necessary to overcome the high transaction costs associated with making the acquisition.
How do "poison pills" impact the market for corporate control?
Poison pills are defensive restructuring techniques used by incumbents to make a hostile takeover significantly more costly and difficult for the bidder, often to the detriment of shareholder value.
- Quote paper
- Marius Beckermann (Author), 2012, The Market for Corporate Control.The Theory and the Empirical Evidence, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/286522
