Takeover Bidding and Internal Corporate Control of Acquiring Firms

Abstract:     
This paper explores the interaction between the internal corporate control mechanism of acquiring firms - managerial ownership and board dismissal of managers - and the incidence of efficient takeovers under asymmetric information about the type of manager of the acquiring firms. The internal control mechanism of acquiring firms needs to be designed so as to alleviate not only the conflict of interest between managers and minority shareholders in the acquiring firms, but also the free-rider problem of atomistic target shareholders. The results of this paper show that the efficiency of takeovers depends on the internal control mechanisms of acquiring firms. The results also provide several comparative static results on the incidence of efficient (or inefficient) takeovers and the optimal internal control mechanism of acquiring firms, and several implications on certain empirical patterns during takeover activity concerning the internal control mechanism of acquiring firms.

Number of Pages in PDF File: 48

Keywords: board of directors, corporate governance, managerial ownership, takeover

JEL Classification: D23, D82, G32, G34, M52

working papers series