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http://ssrn.com/abstract=1161262
 
 

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Market Pressure, Control Rights, and Innovation


Luis Rayo


University of Chicago - Booth School of Business

Haresh Sapra


University of Chicago - Booth School of Business

Miguel Diaz Sr.


affiliation not provided to SSRN

February 9, 2009

Chicago GSB Research Paper No. 08-01

Abstract:     
There has been significant controversy over the desirability of anti-takeover protection devices, such as poison pills and golden parachutes. These devices are usually viewed negatively because they are associated with entrenchment and insider rent extraction. This position, however, is subject to debate. Insider protection, for instance, has the advantage of transferring control to better-informed insiders. In fact, in this paper we show that insider protection can arise endogenously as an optimal contracting device. Our main result is that the optimality of insider protection depends crucially on the degree of innovation of the firm's activities, with insider protection being desirable only under significant innovation. For highly innovative projects, in particular, a takeover bid can be optimally rejected even when it offers a significant premium over the market price of the firm.

Number of Pages in PDF File: 35

JEL Classification: D82, D86, G34

working papers series


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Date posted: July 17, 2008 ; Last revised: February 10, 2009

Suggested Citation

Rayo, Luis and Sapra, Haresh and Diaz, Miguel, Market Pressure, Control Rights, and Innovation (February 9, 2009). Chicago GSB Research Paper No. 08-01. Available at SSRN: http://ssrn.com/abstract=1161262 or http://dx.doi.org/10.2139/ssrn.1161262

Contact Information

Luis Rayo
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Haresh Sapra (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Miguel Diaz Sr.
affiliation not provided to SSRN
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