The appropriate division of authority between a company?s board and its shareholders
has been the central issue in the corporate governance debate for decades. This issue presents most vividly for defensive tactics: the extent to which the board of a potential acquisition target is allowed to prevent the shareholders from responding directly to a hostile bid.
In the US today, the board?s power is extensive; control largely lies with the board. Normative evaluations of current law face two obstacles. First, defensive tactics raise the social welfare question whether, or to what extent, these tactics deter ex ante efficient takeovers. This question cannot be answered empirically because the econometrician can observe bids but cannot observe deterred bids. The social welfare issue is also difficult to resolve using current analytical techniques because the market for corporate control is unusually complex: in it, financial and strategic buyers search for mismanaged companies or synergy targets; and some synergy targets search for acquirers. Turning to targets, the question which defensive tactics level maximizes shareholder welfare also is difficult
to answer because of the qualitative nature of defensive tactics: Is a poison pill more or less privately efficient than a staggered board? What are the welfare consequences of combining a pill with a staggered board or a supermajority voting requirement? In this paper, we write a search equilibrium model of the market for corporate control and solve it by simulating plausible parameters for the variables of interest. Because we specify the number of ex ante efficient acquisitions that could be made, we can estimate market efficiency ? the ratio of made matches to good matches ? under legal regimes that are more or less friendly to defensive tactics. Also, we argue that the common metric among defensive tactics is time: the ability of various tactics to delay bid completion and thus reduce bidder, and thereby increase target, returns. We have two important results: First, strong defensive tactics reduce market efficiency significantly. Our simulations suggest that approximately a $100 billion in deal value is lost each year in consequence of these tactics. Simulations are only suggestive and our simulated model likely overstates the welfare loss. Nevertheless, the result that defensive tactics cause economically significant welfare losses would stand even if our magnitude estimate is halved. Second, the defensive tactics level that maximizes target shareholder welfare is materially higher than the level that maximizes social welfare. These results
also support a methodological claim: equilibrium analysis can illuminate regulatory issues regarding the market for corporate control.
We empirically examine whether and how the doctrine of enhanced judicial scrutiny that emerged from Revlon and its progeny actually affects M&A transactions. Combining hand-coding and machine-learning techniques, we assemble data...Read more
In December 2018, a Corporate Governance Code aimed at large private companies was unveiled, the culmination of an industry-led effort in producing a set of best practices in large private companies. These standards would also facilitate...Read more
Mergers and acquisitions are often motivated by the intention of creating value from intangible assets. We develop a novel word list of intangibles and apply it to takeover announcements. Deals presented with more “intangibles talk” complete more...Read more
We investigate the impact of hedge fund activism on corporate transaction markets. We find that activism targets as well as firms exposed to hedge fund threats increase divestitures and receive more merger bids. On balance, they also make fewer...Read more