Do Bad Targets Become Worse Targets? Evidence from Sequential Transfers of Control Blocks

Abstract

This study examines whether control block transaction, a dominant form of takeover observed outside the U.S., is an effective governance mechanism. Based on a large sample of control block transactions in Korea, we find that a key factor behind a takeover is financial distress in the target, not just for the initial takeover, but also for a series of subsequent takeovers. We also find that new equities are issued by the target during the control transfer process, the proceeds of which are used as capital infusions to the distressed target. Moreover, creditor banks effectively mediate control transfers between outgoing and incoming controlling shareholders, potentially with a lag. Despite this restructuring process, however, target’s financial distress is further exacerbated as control block changes hands, especially multiple times, which is more pronounced when the target size is large relative to the acquirer and mitigated when new equities are issued by targets. Overall, our findings reinforce the empire-building hypothesis of corporate takeovers.

Keywords: Takeover, Financial distress, Equity issuance, Private benefits, Agency problem

JEL Classification: G34