Abstract We study the role of takeover threats as a corporate control mechanism using Aghion and Tirole’s (1997) model of formal and real authority. Shareholders do not monitor the manager’s actions, since ownership is widely dispersed. A corporate raider may monitor, and steps in if a pro¿t opportunity exists. In our model, a takeover threat decreases the manager’s effort and harms shareholders. The effect of a takeover threat on the expected value of the ¿rm is ambiguous. It is in the interest of the corporate raider if severance payments the manager receives upon being ¿red are high. Shareholders, however, prefer them to be low.
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Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number
00E02.