Takeovers: Managerial Incompetence or Managerial Shirking?
Agency theory identifies managerial shirking as the cause for takeovers, while other explanations focus on low-ability managers. This paper formalizes Michael C. Jensen's free cash flow variant of agency theory by constructing a simple two-period game that captures the distinctive empirical implications of the two theories. Using data for petroleum firms following the oil price shock of 1979-80, the authors find that firms undergoing financial restructuring exhibited higher values of Tobin's q. Additionally, evidence of management turnover and workforce cuts emphasizes that takeovers appear primarily designed to address agency concerns. Copyright 1992 by Oxford University Press.
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Volume (Year): 30 (1992)
Issue (Month): 2 (April)
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