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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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File URL: http://mpra.ub.uni-muenchen.de/22123/
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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. Schnitzer, Monika, 1996. "Hostile versus Friendly Takeovers," Economica, London School of Economics and Political Science, vol. 63(249), pages 37-55, February.
  2. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1989. "Characteristics of Hostile and Friendly Takeover Targets," NBER Working Papers 2295, National Bureau of Economic Research, Inc.
  3. Frédéric Deroian & Frédéric Gannon, 2006. "Quality-improving alliances in differentiated oligopoly," Post-Print halshs-00084891, HAL.
  4. Berkovitch, Elazar & Narayanan, M. P., 1993. "Motives for Takeovers: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 347-362, September.
  5. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  6. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  7. Franks, Julian & Mayer, Colin, 1996. "Hostile takeovers and the correction of managerial failure," Journal of Financial Economics, Elsevier, vol. 40(1), pages 163-181, January.
  8. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  9. Hackner, Jonas, 1994. "Collusive pricing in markets for vertically differentiated products," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 155-177, June.
  10. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  11. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
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