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Blockholder Identity, Equity Ownership Structures and Hostile Takeovers

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  • Gary Gorton
  • Matthias Kahl

Abstract

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 proffessional 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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  • Gary Gorton & Matthias Kahl, 1999. "Blockholder Identity, Equity Ownership Structures and Hostile Takeovers," Center for Financial Institutions Working Papers 99-19, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:99-19
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    2. Pombo, Carlos & De la hoz, María Camila, 2015. "Institutional Investors and Firm Valuation: Evidence from Latin America," Galeras. Working Papers Series 040, Universidad de Los Andes. Facultad de Administración. School of Management.
    3. Vedres, Balázs, 2000. "A tulajdonosi hálózatok felbomlása. A rekombináns tulajdonformák szerepe és a hazai nagyvállalatok tulajdonszerkezetének jellemzői a kilencvenes évek végén [The break-up of the ownership networks. ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 680-699.
    4. Mason, Charles F. & Gottesman, Aron A. & Prevost, Andrew K., 2003. "Shareholder intervention, managerial resistance, and corporate control: a Nash equilibrium approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 466-482.
    5. Stuart L. Gillan & Laura T. Starks, 2002. "Institutional Investors, Corporate Ownership, and Corporate Governance: Global Perspectives," WIDER Working Paper Series DP2002-09, World Institute for Development Economic Research (UNU-WIDER).
    6. Nicole Boyson & Robert Mooradian, 2011. "Corporate governance and hedge fund activism," Review of Derivatives Research, Springer, vol. 14(2), pages 169-204, July.
    7. Muniandy, Puspa & Tanewski, George & Johl, Shireenjit K., 2016. "Institutional investors in Australia: Do they play a homogenous monitoring role?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 266-288.
    8. Andriosopoulos, Dimitris & Yang, Shuai, 2015. "The impact of institutional investors on mergers and acquisitions in the United Kingdom," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 547-561.
    9. Lin, Lin & Tai, Vivian W. & Hsu, Chien-Lung & Yang, Chung-Chun, 2016. "Who is more visionary in mergers: Commercial vs. investment banks," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 133-152.

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