Hostile takeovers and the correction of managerial failure

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Abstract

This paper examines the disciplining function of hostile takeovers in the U.K. in 1985 and 1986. We report evidence of high board turnover and significant levels of post-takeover restructuring. Large gains are anticipated in hostile bids as reflected in high bid premiums. However, there is little evidence of poor performance prior to bids, suggesting that the high board turnover does not derive from past managerial failure. Hostile takeovers do not therefore perform a disciplining function. Instead, rejection of bids appears to derive from opposition to post-takeover redeployment of assets and renegotiation over the terms of bids.

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This paper is part of an ESRC funded project, number W102251003, on ‘Capital Markets, Corporate Governance, and the Market for Corporate Control’. We are grateful to Nick Carrick, Luis Correia da Silva, and Marc Goergen for valuable research assistance. We wish to thank John Chown for financial assistance on this project and for helpful discussions.

The paper has been presented at the 1993 Annual Meeting of the American Finance Association in Anaheim, at the Annual Meeting of the French Finance Association in Paris, at the Annual Meeting of the European Finance Association in Athens, at a conference on European Restructuring at INSEAD and at seminars in Essex, Keele, Oxford, Paris, and Warwick.

We are particularly grateful to discussants Patrick Bolton, Stuart Gilson, Kristian Rydqvist, and Paul Seabright for valuable suggestions. We are also grateful for comments from Swami Bhaskaran, Michael Brennen, Michel Habib, David Hirshleifer, Ernst Maug, Narayan Naik, Kjell Nyborg, and Walter Torous. We also wish to thank Richard Ruback (the editor) and John Pound (the referee) for many helpful comments in the revision of the manuscript.

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