Where was the 'Market for Corporate Control' when we Needed it?

Abstract

It is generally acknowledged that corporate governance failings played a contributory role to the recent banking crisis. In particular, there has been widespread criticism of the chronic and reckless risk-taking by management which was fuelled by the banks’ remuneration policies. This would appear to run counter to the market for corporate control theory which suggests that takeovers should have a disciplinary effect on managers. The purpose of this paper is to consider why the market for corporate control did not lead to share price reductions and subsequent takeovers in firms where there was poor risk management and inadequate oversight by the board. Alternatively, it considers why the fear that this would happen did not constitute a sufficient deterrent to prevent poor risk management in the first place.