The Evolution of the Market for Corporate Control

In a canonical takeover model we let informed large shareholders choose between making a bid and initiating a sale to another acquirer. Such takeover activism complements direct takeovers because the very choice mitigates the asymmetric information problem, thereby improving efficiency. As more investors enter the market for corporate control, takeover activism increasingly substitutes for direct takeovers and becomes the prevailing mode of disciplinary control change. Our model shows how an evolution towards takeover activism -characterized by a symbiotic relationship between activist hedge funds and private equity- arises to overcome asymmetric information and collective action problems through a form of intermediation.