Abstract

The evidence that takeovers do not benefit shareholders of acquiring firms is substantial. One explanation for the existence of negative returns can be traced to the agency relationship between acquiring firm managers and their shareholders. Since much managerial remuneration is tied to firm size, corporate acquisition is one method by which management can gain from exploiting this relationship. Negative returns (on average) to acquiring firm shareholders also open the possibility that aggregate returns (target plus acquirer returns) from the takeover process may be zero or even negative. This would contradict the widely held belief that takeovers are wealth creating. A compilation of historical data on returns to acquiring firm shareholders and manager remuneration support this hypothesis. Finally, additional regulation in the market for corporate control is not the appropriate policy response to takeover abuses. Rather, the solution lies in making corporate boards of directors more responsive to the concerns of their shareholders.