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Breach of Trust in Takeovers and the Optimal Corporate Charter

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  • Schnitzer, M.

Abstract

This paper analyzes how takeovers, various takeover defenses, and golden parachutes affect the value of target companies using an incomplete contracts framework. The author considers a raider who can improve the efficiency of production and appropriate rents of stakeholders of the company. Anticipating the expropriation of his rents, the manager’s relationship specific investments will be too small, which may offset the value increase through the takeover. The simultaneous use of poison pills and golden parachutes can solve the underinvestment problem without forgoing profitable takeovers. However, the privately optimal level and composition of takeover defenses need not be socially efficient. Copyright 1995 by Blackwell Publishing Ltd.
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Suggested Citation

  • Schnitzer, M., 1992. "Breach of Trust in Takeovers and the Optimal Corporate Charter," Working papers 92-10, Massachusetts Institute of Technology (MIT), Department of Economics.
    • Handle: RePEc:mit:worpap:92-10
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    Cited by:

    1. Heinrich, Ralph P., 1999. "Complementarities in Corporate Governance - A Survey of the Literature with Special Emphasis on Japan," Kiel Working Papers 947, Kiel Institute for the World Economy (IfW Kiel).
    2. Schmidt Klaus M. & Schnitzer Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 264-287, June.
    3. Ling Cen & Sudipto Dasgupta & Rik Sen, 2016. "Discipline or Disruption? Stakeholder Relationships and the Effect of Takeover Threat," Management Science, INFORMS, vol. 62(10), pages 2820-2841, October.
    4. Kräkel, Matthias & Müller, Daniel, 2015. "Merger efficiency and managerial incentives," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 51-63.
    5. Ayse Mumcu, 2005. "Takeover Threat, Managerial Incentives, and Term Structure of Investment," Working Papers 2005/02, Bogazici University, Department of Economics.
    6. Maug, Ernst, 1997. "Boards of directors and capital structure: Alternative forms of corporate restructuring," Journal of Corporate Finance, Elsevier, vol. 3(2), pages 113-139, April.
    7. Kräkel, Matthias & Müller, Daniel, 2014. "Merger Performance and Managerial Incentives," Bonn Econ Discussion Papers 02/2014, University of Bonn, Bonn Graduate School of Economics (BGSE).
    8. Marcel Canoy & Yohanes E. Riyanto & Patrick Van Cayseele, 2000. "Corporate takeovers, bargaining and managers' incentives to invest," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 1-18.
    9. Heli Wang & Shan Zhao & Guoli Chen, 2017. "Firm-specific knowledge assets and employment arrangements: Evidence from CEO compensation design and CEO dismissal," Strategic Management Journal, Wiley Blackwell, vol. 38(9), pages 1875-1894, September.
    10. Jackson, Gregory, 2010. "Understanding corporate governance in the United States: An historical and theoretical reassessment," Arbeitspapiere 223, Hans-Böckler-Stiftung, Düsseldorf.
    11. Iossa, Elisabetta, 2001. "Third Party Monitoring and Golden Parachutes," CEPR Discussion Papers 2777, C.E.P.R. Discussion Papers.
    12. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.

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