Lecture 6- The market for corporate control Flashcards
When would a hostile takeover be used?
If the target board and shareholders find premium too low, and don’t want to relinquish control they can advise the CEO to reject the offer.
Characteristics of a hostile takeover
More costly- Required increasing the offer price to make shareholders indifferent to parting with their firm.
There is common motivation that the top management and usually the CEO are sub-optimally utilising the assets.
What is a friendly takeover?
If the target board and shareholders are willing to accept premium offered, or exchange ratio for stake in the combined firm.
What do Fama and Jensen (1983) define separation of ownership and control?
A firm that has distinctly separated decision making and risk bearing functions.
What happens as shareholding structures become more spread out and complex?
Managers are appointed to zealously represent shareholder interest and maximise firm value.
CEOs will be appointed to make decisions while shareholders bare the risk from their decisions.
Explain the difference between residual claims and fixed payments in a company.
CEOs receive a salary (fixed payments) while shareholders have residual claims on value of firm (equity).
Shareholders wealth bears the risk of decisions made by CEOs while CEOs are relatively insulated.
Explain incentive misalignment in a company
Separation of ownership and control can lead to incentive misalignment or agency problems.
The firm must ensure that the ECO is zealously maximising the firms values.
Inefficient monitoring of the CEO can lead to conflict of interest as the CEO might act to maximise their wealth instead of shareholders. However stock and option grants can make the CEOs wealth more sensitive to the firms value.
However if the CEO has been identified as not acting in shareholders best interest, this can lead to the firms value being lower than expected.
This triggers other firms to make a takeover bid to replace the incumbent CEO and make better use of their assets. (Market for Corporate Control)
