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The Role of Executives in Hostile Takeover Attempts

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  • Mohd, Irfan

Abstract

This paper proposes a two-stage game theoretic model in which the discretionary power of executives acts as an implicit defense against hostile takeovers. Following managerial enterprise models, this paper analyzes the effects of target’s executives’ discretionary power over R&D and advertising in defeating hostile takeover attempts. It is shown that in vertically differentiated industries, in equilibrium, target’s executive keep low level of R&D and advertising to make their firm an unattractive target for hostile takeovers. The model reveals that the executives are influenced by their self-interest of monetary and non-monetary benefits and this self-interest behavior makes the industry less differentiated. Additionally, the firm’s takeover (hostile or friendly) is endogenously determined by the executives.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22123.

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Date of creation: 20 Jan 2010
Date of revision: 15 Apr 2010
Handle: RePEc:pra:mprapa:22123

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Keywords: Executives Discretion; Hostile Takeovers; Vertical Differentiation; R&D; Advertising;

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  1. Deroian, Frederic & Gannon, Frederic, 2006. "Quality-improving alliances in differentiated oligopoly," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(3), pages 629-637, May.
  2. Schnitzer, Monika, 1996. "Hostile versus friendly takeovers," Munich Reprints in Economics, University of Munich, Department of Economics 19895, University of Munich, Department of Economics.
  3. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  5. Berkovitch, Elazar & Narayanan, M. P., 1993. "Motives for Takeovers: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(03), pages 347-362, September.
  6. Franks, Julian & Mayer, Colin, 1996. "Hostile takeovers and the correction of managerial failure," Journal of Financial Economics, Elsevier, Elsevier, vol. 40(1), pages 163-181, January.
  7. Hackner, Jonas, 1994. "Collusive pricing in markets for vertically differentiated products," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 12(2), pages 155-177, June.
  8. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  9. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  10. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1987. "Characteristics of Hostile and Friendly Takeover Targets," NBER Working Papers 2295, National Bureau of Economic Research, Inc.
  11. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 55-86, January.
  12. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
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