Essays on the Market for Corporate Control

Abstract

This dissertation examines the relative importance of the information effect on corporate takeover in total takeover gains. It develops the measure of information effect based on the residual income valuation model with I/B/E/S analysts' abnormal earnings forecast revisions. Empirical results show that the information effect and the synergy are estimated to be around 4 percent and 22 percent respectively in the 1,372 US samples during 1980- 2006. Furthermore, almost all of the synergy gains disappear as the deal is expected to be failed while the measured information effect remains afterwards. The evidence suggests that the information effect is more evident in the disciplinary (failed & high Tobin's-q for bidders) or acquisitional (small capitalization & high book-to-market ratio for targets) takeovers while the synergy is greater in the successful tender-offer. Overall, the corporate takeover bid generates information gains up to 15 percent of total takeover gains. It also develops a theoretical model on the market for corporate control using the assumption that there exists management slack which does not contribute to shareholder wealth. This model provides explanations to several questions about corporate takeovers, which include the following: Why do managers prefer takeovers to other investment alternatives? When are they likely to occur? What are the sources of takeover gains? Do takeovers create value? Why are stock offers more common? Who gains from such transactions both in the long and short runs? Why do they occur in massive waves? Why is diversification often attractive to bidder managers? How does corporate governance play its role during this process? And why do managers often resist takeovers? The agency model this paper develops is compatible with existing theories on takeovers including neoclassical, inefficient stock market, and the free cash flow approach. Furthermore, it is consistent with most of the empirical evidence available.