Breach of Trust in Hostile Takeovers
AbstractThe paper questions the common view that share price increases of firms involved in hostile takeovers measure efficiency gains from acquisitions. Even if such gains exist, most of the increase in the combined value of the target and the acquirer is likely to come from stakeholder wealth losses, such as declines in value of subcontractors' firm-specific capital or employees' human capital. The use of event studies to gauge wealth creation in takeovers is unjustified. The paper also suggests a theory of managerial behavior, in which hiring and entrenching trustworthy managers enables shareholders to commit to upholding implicit contracts with stakeholders. Hostile takeovers are an innovation allowing shareholders to renege on such contracts ex post, against managers' will. On this view, shareholder gains are redistributions from stakeholders, and can in the long run result in deterioration of trust necessary for the functioning of the corporation.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2342.
Date of creation: May 1989
Date of revision:
Publication status: published as Andrei Shleifer, Lawrence H. Summers. "Breach of Trust in Hostile Takeovers," in Alan J. Auerbach, ed., "Corporate Takeovers: Causes and Consequences" University of Chicago Press (1988)
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