“Corporate Governance, Agency Cost and Takeover Decision” by Weidong Tian
University of North Carolina
We study how internal and external corporate governance mechanisms jointly affect the large shareholder's takeover decision. The large shareholder monitors the management and has option to takeover the firm, while managers steal from the firm resulting in agency costs. Small shareholders are free riders in monitoring benefits (in the non-takeover case) and in takeover gains (in the takeover case). External corporate governance controls impose stealing costs to the manager, whereas internal controls are closely related to the monitoring costs for large shareholders. In equilibrium, large shareholder's takeover decision, takeover premium, manager's stealing strategy and firm value are determined endogenously. We find that both internal and external controls have significant effects on agency costs and takeover decision. Our results are robust in the presence of managerial defenses and when the model is dynamic.