Post by Sapphire Capital on Sept 12, 2008 8:39:13 GMT 4
Optimal Takeover Mechanisms and Innovation
Luis Rayo
University of Chicago - Graduate School of Business
Haresh Sapra
University of Chicago - Graduate School of Business
July 16, 2008
Chicago GSB Research Paper No. 08-01
Abstract:
There has been significant controversy over the desirability of anti-takeover protection devices, such as poison pills and golden parachutes. These devices are usually viewed negatively because they are associated with entrenchment and insider rent extraction. This position, however, is subject to debate. Insider protection, for instance, has the advantage of transferring control to better-informed insiders. In fact, in this paper we show that insider protection can arise endogenously as an optimal contracting device. Our main result is that the optimality of insider protection depends crucially on the degree of innovation of the firm's activities, with insider protection being desirable only under significant innovation. For highly innovative projects, in particular, a takeover bid can be optimally rejected even when it offers a significant premium over the market price of the firm.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1161262_code1044619.pdf?abstractid=1161262&mirid=2
Luis Rayo
University of Chicago - Graduate School of Business
Haresh Sapra
University of Chicago - Graduate School of Business
July 16, 2008
Chicago GSB Research Paper No. 08-01
Abstract:
There has been significant controversy over the desirability of anti-takeover protection devices, such as poison pills and golden parachutes. These devices are usually viewed negatively because they are associated with entrenchment and insider rent extraction. This position, however, is subject to debate. Insider protection, for instance, has the advantage of transferring control to better-informed insiders. In fact, in this paper we show that insider protection can arise endogenously as an optimal contracting device. Our main result is that the optimality of insider protection depends crucially on the degree of innovation of the firm's activities, with insider protection being desirable only under significant innovation. For highly innovative projects, in particular, a takeover bid can be optimally rejected even when it offers a significant premium over the market price of the firm.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1161262_code1044619.pdf?abstractid=1161262&mirid=2