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Blockholder Identity, Equity Ownership Structures, and Hostile Takeovers

  • Gary Gorton
  • Matthias Kahl

We determine firms' equity ownership structures and provide a theory of hostile takeovers by distinguishing the roles of two types of blockholders: rich investors and institutional investors. We also distinguish the roles of two types of stock markets: the block market and the market with small investors. Rich investors have their own money at stake while institutional investors are run by professional managers and hence face agency conflicts. Because rich investors face no agency problems they are better at monitoring managers. If their wealth is insufficient to control all corporations, then agency-cost free' capital is scarce. We investigate the allocation of this scarce resource. A hostile takeover is the consequence of a state-contingent allocation of agency-cost free capital. We show that only rich investors engage in hostile takeovers. Institutional investors instead are either permanent blockholding monitors or facilitate takeovers by selling blocks to rich investors. Even though all firms are ex ante identical, some may rely on the takeover mechanism while others rely on permanent institutional monitoring. We characterize the ownership structure of firms showing, in particular, that (ex ante) identical firms can have different ownership structures. Some can have initially dispersed ownership while others have an institutional blockholder.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7123.

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Date of creation: May 1999
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Handle: RePEc:nbr:nberwo:7123
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