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Contests for corporate control often create a conflict between a legal principle, the business judgment rule (BJR), and an economics principle, the efficient market hypothesis (EMH). The BJR focuses on the process of decision making and requires managers to be guided by their integrity and diligence. The EMH focuses on outcomes and expects decisions to be guided by stock prices. Ideally the principles do not conflict, but when they do, when the market disagrees with managers' decisions, it is important to understand why. This article discusses the principles, why they sometimes conflict, and circumstances when one should outweigh the other.

This research uses accounting information to supplement abnormal returns evidence in order to gauge the performance of greenmailed firms. Our results support the management entrenchment hypothesis; target firm earnings are poor relative to industry in the years surrounding the greenmail event, and earnings do not significantly improve as would be expected under the shareholders' interest hypothesis. This result holds after adjusting for greenmail premia net of tax effects. Evidence on investment spending suggests firms that pay greenmail differ substantially from their industries, but in a negative direction. In contrast, the industry‐adjusted earnings of non‐greenmail repurchasing firms are significantly greater than the earnings of greenmailed firms. Together, these results are consistent with the contention that greenmailed firms are not managed in shareholders' interests; they underperform their industry, the poor operating results are not attributable to higher investment outlays associated with a long‐term strategic focus, and performance does not improve. This is consistent with observed negative abnormal returns being attributable to both a lost takeover premium and a lost opportunity for improved corporate performance.