Working Paper: NBER ID: w2342
Authors: Andrei Shleifer; Lawrence H. Summers
Abstract: 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.
Keywords: Hostile Takeovers; Implicit Contracts; Wealth Redistribution; Corporate Governance
JEL Codes: G34; M14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hostile takeovers (G34) | opportunistic behavior (D16) |
| opportunistic behavior (D16) | breach of implicit contracts (D86) |
| breach of implicit contracts (D86) | wealth transfer (D64) |
| wealth transfer (H87) | losses incurred by stakeholders (G33) |
| increase in stock prices (G10) | social benefits (P36) |
| layoffs and wage reductions (J65) | increased shareholder value (G34) |
| removal of incumbent managers (G34) | ability of shareholders to engage in hostile takeovers (G34) |
| ability of shareholders to engage in hostile takeovers (G34) | wealth redistribution (H23) |