Agency costs in the market for corporate control: evidence from UK takeovers

Abstract

Purpose

This paper aims to examine whether agency costs predict disciplinary takeover likelihood for the UK listed companies between 1986 and 2015.

Design/methodology/approach

Using survival analysis, the approach is to identify candidates for disciplinary takeover on the basis of Tobin’s Q (TQ), which is consistent with the approach advocated by Manne (1965). This study then examines how indicators of agency costs affect takeover likelihood within the set of disciplinary candidates.

Findings

This paper provides evidence of the effectiveness of TQ, rather than excess return, in identifying disciplinary takeover candidates. Takeover hazard for disciplinary candidates is higher for companies with higher levels of asset utilization and sales growth in particular. Companies with stronger agency problems are relatively less susceptible to disciplinary takeover.

Practical implications

Given the UK context of the study, where anti-takeover provisions are disallowed and when compared to findings of US studies, the results imply some support for the effectiveness of an open merger policy.

Originality/value

While the connection between takeover likelihood and the market for corporate control has been made in previous studies, the study adopts a more explicit agency theory framework than previous studies of takeover likelihood. A key component of the contribution follows from differentiating candidates for disciplinary takeovers from other forms of mergers and acquisitions.

Citation

Jones, E., Xu, B. and Kamp, K. (2020), "Agency costs in the market for corporate control: evidence from UK takeovers", Review of Accounting and Finance, Vol. 20 No. 1, pp. 23-52. https://doi.org/10.1108/RAF-04-2020-0083