Why Higher Takeover Premia Protect Minority Shareholders
Swedish House of Finance
London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Bocconi University - Department of Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
Journal of Political Economy, Vol. 106 No. 1, February 1998
Posttakeover moral hazard by the acquirer and free-riding by the target shareholders lead the former to acquire as few shares as necessary to gain control. As moral hazard is most severe under such low ownership concentration, inefficiencies arise in successful takeovers. Moreover, share supply is shown to be upward-sloping. Rules promoting ownership concentration limit both agency costs and the occurrence of takeovers. Furthermore, higher takeover premia induced by competition translate into higher ownership concentration and are thus beneficial. Finally, one share one vote and simple majority are generally not optimal, and socially optimal rules need not emerge through private contracting.
JEL Classification: G31, G32, G34Accepted Paper Series
Date posted: April 11, 1998
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