Governance, type of blockholder, and negotiating power in takeovers

Abstract

Purpose

Agency theory suggests that if managers are not monitored, takeover negotiations may be contaminated by agency conflicts, which may weaken a firm's bargaining position. This paper argues that some blockholders are more effective monitors than others, and tests whether the negotiating power of a target or bidder is influenced by their respective blockholder composition. The paper aims to discuss these issues.

Design/methodology/approach

This paper classifies target and bidder outside blockholders as either aggressive monitors or moderate monitors, and tests whether the degrees of monitoring effectiveness influence a firm's share of the total wealth created by the takeover (a proxy for bargaining power).

Findings

This paper finds that firms that have the types of outside blockholders with a greater tendency to monitor managers elicit higher takeover gains. This suggests that negotiating power in takeovers is conditioned on the types of blockholders that monitor the target and bidder. The results support the premise that better monitoring leads to higher gains for shareholders in a takeover. In particular, the findings suggest that the greater the tendency of outside blockholders to monitor managers, the lower the level of takeover-related agency conflicts and the stronger a firm's relative bargaining power.

Originality/value

These findings imply that agency conflicts on either side of a takeover bid may be reduced by better monitoring, but especially among bidders.

Citation

Harris, O., Madura, J. and Glegg, C. (2013), "Governance, type of blockholder, and negotiating power in takeovers", Managerial Finance, Vol. 39 No. 11, pp. 1077-1099. https://doi.org/10.1108/MF-05-2011-0108