Takeover Market - Effects on Market Efficiency

Takeover market

Takeover market, also referred to as market for corporate control, is the mechanism by which firms are matched up with owners and managerial teams, who can maximize the utility upon the firm’s resources (Brealey, Myers and Allen, 2008). Creatively, Jensen and Ruback (1983) argue that takeover market can be most appropriately viewed as the arena in which managerial teams compete for the rights to manage corporate resources.

There are three major ways to replace the management of a firm: proxy contests, mergers and tender offers. In a proxy contest, a group of shareholders can launch a voting campaign against incumbent board with the desire of electing a new one to watch on the management and help to run the firm more efficiently. A proxy contest can be very costly because dissident shareholders have to use their own money while the management may use the funds and resources of the firm to defend itself (Kim, Nofsinger and Mohr, 2009). However, although proxy fights are very difficult to win, they can be very powerful singles to prompt incumbent management to make some changes (Brealey, Myers and Allen, 2008). Mergers where managements of both acquiring firm and target firm agree to the deal are known as friendly mergers while situations where the acquirer directly makes an offer to shareholders bypass the target firm’s board of directors are hostile tender offers.

Effects on market efficiency

Market efficiency dates back to Louis Bachelier (1900), and it was largely expressed with Martingale model rather than random walk model before Fama (1970) systematically developed it. Fama (1970) defines three forms of market efficiency: in weak form efficiency share prices only reflect information about historical prices; in semi-strong efficiency all obvious, public information is reflected in share prices; and in strong form efficiency share prices reflect all