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Breach of Trust in Hostile Takeovers

  • Andrei Shleifer
  • Lawrence H. Summers

The 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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File URL: http://www.nber.org/papers/w2342.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2342.

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Date of creation: Aug 1987
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Publication status: published as Shleifer, Andrei and Lawrence H. Summers. "Breach of Trust in Hostile Takeovers," From Corporate Takeovers: Causes and Consequences, edited by Alan J. Auerbach, pp. 33-56. Chicago: The University of Chicago Press, 1988.
Handle: RePEc:nbr:nberwo:2342
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  1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  2. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  3. Steven G. Allen & Robert L. Clark & Daniel A. Sumner, 1986. "Postretirement Adjustments of Pension Benefits," Journal of Human Resources, University of Wisconsin Press, vol. 21(1), pages 118-137.
  4. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  5. Andrei Shleifer & Robert W. Vishny, 1987. "Management Buyouts as a Response to Market Pressure," NBER Chapters, in: Mergers and Acquisitions, pages 87-102 National Bureau of Economic Research, Inc.
  6. Harris, Milton & Holstrom, Bengt, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 315-33, July.
  7. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
  8. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  9. Alderson, Michael J & Chen, K C, 1986. " Excess Asset Reversions and Shareholder Wealth," Journal of Finance, American Finance Association, vol. 41(1), pages 225-41, March.
  10. Akerlof, George A, 1983. "Loyalty Filters," American Economic Review, American Economic Association, vol. 73(1), pages 54-63, March.
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