Ownership Structure and Synergistic Takeover: Implications on Corporate Governance (With Chang-Mo Kang)

This paper examines the managerial disciplinary role of takeover motivated by pursuit of operational synergies, and explores how this governance function interacts with the ownership structure of target firms. We model a firm in which the manager has private information about the state of economy and may hide her under-provision of effort by misreporting the state to shareholders. The presence of bidders who search for operational synergies alleviates this agency problem, since the managerial misreport makes the firm undervalued and, thus, a more attractive takeover target. Our analysis shows that, while the control premium required by controlling shareholders reduces the likelihood of takeover incidence, it strengthens the managerial disciplinary effect of takeovers for high-synergy potential targets , i.e., targets that tend to offer large operational synergies to potential acquirers. Our analysis provides a number of novel empirical predictions on the correlation between the firm’s synergy potential, ownership structure and other governance mechanisms, such as managerial compensation and monitoring function of large shareholders.  We also discuss policy implications regarding the social optimality of ownership concentration.

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