SFB 303 Discussion Paper No. A - 334

Author: Schnitzer, Monika
Title: Breach of Trust in Takeovers and the Underinvestment Effect
Abstract: This paper analyzes the impact of takeovers on the value of a target company in a game theoretic framework that combines a principal agent setting with the incomplete contracts approach. We argue that takeovers influence the management's investment decisions. It is shown that the increase in value through a takeover may be offset by ex ante reactions of the managers who reduce their relationship specific investments and focus inefficiently much on the short run if the possibility of a takeover is anticipated. We show how shareholders can mitigate negative side effects of takeovers through the optimal choice of a corporate charter.
Keywords: Takeovers, Short-termism, Incomplete Contracts
JEL-Classification-Number: 026, 611, 511
Creation-Date: May 1991
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