The Search for Corporate Control
London Business School - Department of Finance; University of California, Los Angeles (UCLA) - Finance Area
This paper analyzes the market for corporate control and acquisitions by explicitly modeling a typical firm's choice whether to become a potential acquirer or target. I add synergistic motives to a multitask principal-agent framework with moral hazard between managers and shareholders. I argue that the terms of an M&A deal are determined not in isolation but in a market equilibrium context, therefore the merger transaction is embedded in a dynamic general-equilibrium search model. This framework links explicit and implicit incentives in a novel way. By modeling the choice explicitly I reconcile the evidence that in mergers target shareholders gain whereas acquirer shareholders seem to lose or gain nothing, yet most of the time they do not block the acquisition. Apart from that, it is shown that Golden Parachutes are an optimal form of compensation regarding merger-related incentives. The model also explains financial intermediation in the M&A market. I establish efficiency results and explain how merger waves might arise, in addition to other (testable) implications.
Number of Pages in PDF File: 68
Keywords: Mergers and Acquisitions, Search and Matching Models, Moral Hazard, Multitask, Golden Parachute, Implicit Incentives, Abnormal Return, Synergy
JEL Classification: C78, D82, D83, G34, J33, G14, M52
Date posted: July 14, 2007 ; Last revised: May 5, 2009
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