Blockholder Identity, Equity Ownership Structures, and Hostile Takeovers

62 Pages Posted: 1 Jun 2006 Last revised: 19 Dec 2022

See all articles by Matthias Kahl

Matthias Kahl

University of California, Los Angeles (UCLA) - Anderson School of Management

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: May 1999

Abstract

We determine firms' equity ownership structures and provide a theory of hostile takeovers by distinguishing the roles of two types of blockholders: rich investors and institutional investors. We also distinguish the roles of two types of stock markets: the block market and the market with small investors. Rich investors have their own money at stake while institutional investors are run by professional managers and hence face agency conflicts. Because rich investors face no agency problems they are better at monitoring managers. If their wealth is insufficient to control all corporations, then agency-cost free' capital is scarce. We investigate the allocation of this scarce resource. A hostile takeover is the consequence of a state-contingent allocation of agency-cost free capital. We show that only rich investors engage in hostile takeovers. Institutional investors instead are either permanent blockholding monitors or facilitate takeovers by selling blocks to rich investors. Even though all firms are ex ante identical, some may rely on the takeover mechanism while others rely on permanent institutional monitoring. We characterize the ownership structure of firms showing, in particular, that (ex ante) identical firms can have different ownership structures. Some can have initially dispersed ownership while others have an institutional blockholder.

Suggested Citation

Kahl, Matthias and Gorton, Gary B., Blockholder Identity, Equity Ownership Structures, and Hostile Takeovers (May 1999). NBER Working Paper No. w7123, Available at SSRN: https://ssrn.com/abstract=165132

Matthias Kahl

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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P.O. Box 208200
New Haven, CT 06520-8200
United States

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