Academic journal article Revue Canadienne des Sciences de l'Administration

Takeover Bid Resistance and the Managerial Welfare Hypothesis: Evidence from the Canadian Market

Academic journal article Revue Canadienne des Sciences de l'Administration

Takeover Bid Resistance and the Managerial Welfare Hypothesis: Evidence from the Canadian Market

Article excerpt

The public ownership of the modern corporation is recognized as an important source of inefficiency, since corporate decision makers and managers are not always stockholders in the business. Corporate managers have many personal goals, which are not necessarily compatible with those of the shareholders. In the absence of a major shareholder, and under imperfect competition in the labor market, managers may run the company in order to realize their personal goals.

Minority shareholders can be protected by internal control mechanisms, such as the board of directors, or external control devices, such as capital markets and managerial labour markets (Fama, 1980). The board of directors has the power to hire and fire managers who engage in non-value-maximizing behavior. In practice, however, boards are rarely an effective device to discipline managers, since they are rarely independent. "The elected directors are often either insiders loyal to the firm's managers, or they are outsiders with a financial interest in the continuity of management, such as lawyers or advertisers for the firm" (Shleifer & Vishny, 1988, p. g) Even when directors are determined to do their job, they are restricted by the information provided by managers, who have an incentive to keep secret valuable information.

In some cases, the board can design contracts for managers that tie their interests to those of the shareholders. Market response to such arrangements is much greater when the incentive contract is short-term rather than long-term. Thus, the ability of such compensation arrangements to protect minority shareholders is unclear. "No study we know of indicates that the incentives provided by extant compensation contracts effectively discourage non-value-maximizing behavior" (Shleifer & Vishny, 1988, p. 10).

If internal control devices are not efficient in limiting non-value-maximizing behavior, external control mechanisms, such as the capital or takeover market, and the managerial labour market, may play a significant role, and may be more effective in maximizing the value of the firm.

This paper analyses the efficiency of the takeover market as a means of protecting minority shareholders and as a tool for disciplining corporate managers. A study of the Canadian takeover market provides some empirical results which tend to support the managerial welfare hypothesis. In the following sections, we briefly describe the role of the market in corporate control, summarize the hypotheses and our model, describe the data and variables, and present the results and some concluding remarks.


According to Manne (1965), the takeover market provides an interesting setting in which to study the agency conflicts between managers and shareholders, because firms subject to takeovers are often those which are managed poorly. "Only the take-over scheme provides some assurance of competitive efficiency among corporate managers and thereby affords strong protection to the interests of vast numbers of small noncontrolling shareholders...The market for corporate control gives to these shareholders both power and protection commensurate with their interest in corporate affairs."(pp. 112-113). In a takeover, the bidder deals directly with the target's shareholders, rather than with its management, as is the case in a merger. By so doing, the bidder can more easily remove incumbent managers who do not act in the best interests of shareholders.

Managers of target firms can use a variety of defensive or offensive tactics to block the transaction, which can significantly impede the role of the market in corporate control, protecting minority shareholders. However, until recently, few researchers have studied the behavior of the takeover market to find the actual motives behind managers' actions.

In a study of American corporations, Morck, Shleifer, and Vishny (1988) (MSV) found that hostile targets and friendly targets were very different types of companies, suggesting that takeover motives may differ and, therefore, may determine the receptiveness of the intended target. …

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