How and to what extent do managerial control benefits shape the efficiency of the takeover market? We revisit this question by estimating both the dark and bright sides of managerial control benefits in an industry equilibrium model. On the dark side, managers’ private benefits of control distort firms’ takeover incentives and hinder the reallocation role of the takeover market. On the bright side, fear of a takeover induces underperforming managers to exert more effort and enhances the disciplinary role of the takeover market. Our estimates suggest that the bright-side effect increases the value created by an active takeover market by 21%, comparable in magnitude to the dark-side effect. It is also important to account for this bright-side effect in explaining certain features of the takeover market, including a low takeover-performance sensitivity.
Author William NordhausAMERICAN ECONOMIC REVIEW VOL. 109, NO. 6, JUNE 2019