QUESTIONS:

1. How does the management competition model proposed by Jensen and Ruback (1983) differ
from the traditional view on corporate control?
2. What is the main reason that managers oppose takeovers according to Jensen and Ruback
(1983)?
3. Name at least three takeover gains.
4. Name three managerial actions that could prevent takeovers, as proposed by Jensen and
Ruback (1983).
5. Explain Rolls (1986) Hubris Hypothesis.
6. What is, according to Roll (1986), a firms lower bound in terms of valuation?
7. What price movements does Hubris predict for bidding firms?
8. Name the three takeover motives according to Hayward and Hambrick (1997).
9. Which variables do Hayward and Hambrick (1997) use to define hubris in their research?
10. Which aspects are incorporated in weak board vigilance?
11. A raid should, according to Grossman and Hart (1980), only take place if
12. How can shareholders voluntarily dilute their interest to make a raid possible?
13. According to Grossman and Hart (1980), raids are unlikely because minority shareholders can
easily free ride on the improvements made by the raider. In reality, however, raids do take place.
What is the most obvious explanation for raids taking place according to Grossman and Hart
(1980)?
14. Should dilutions be allowed from a social welfare point of view?
15. How can and why would small shareholders indirectly support a large shareholder according to
Shleifer and Vishny (1986)?
16. What effect does the jawboning mechanism have on takeover success?
17. Why would you, according to Hirshleifer and Titman (1990), never bid for more than the minimum
amount of shares needed to gain control?
18. What strategy can a bidder execute when there is symmetric information between him and the
shareholders?
19. Moeller, Schlingemann and Stulz (2005) study large loss deals. Give three reasons why the 90s
wave suggests poor returns and one reason why it suggests better returns.
20. Why is a desire to diversify not one of the plausible explanations for large loss deals?
21. What does Q stand for in Jovanovic and Rousseaus 2002 paper?

22. What does Jensen (2005) mean by gaming the system?

23. Why can the market for corporate control not solve the issue of overvalued stocks?
24. Shortly elaborate on the solution for overvalued stock as proposed by Jensen (2005)?
25. A function of what factors is an industry structure according to Mitchell and Mulherin (1996)?
26. Name three examples of an industry shock.
27. Explain the difference between the neoclassical theory and the behavioural theory of merger
waves as proposed by Harford (2005)?
28. Harford (2005) favours the neoclassical theory over the behavioural theory. What critical
condition, next to an industry shock, is necessary to drive a merger wave?
29. Why do firms according to Guo, Hotchkiss and Song (2011) increase in value during an LBO?

ANSWERS:
1. The management competition model assumes that the market for corporate control is a place
where management teams compete for the rights to determine the management of corporate
resources, whereas the traditional view argues that financiers and stockholders are the main
activists.
2. Management is most likely to be replaced after a takeover, which means they lose power and
prestige.
3. Examples of takeover gains are:
- Synergy
- Vertical integration
- Economies of scale/scope
- Reduced agency costs
4. Managerial actions that could prevent takeovers are:
- Changes in the state of incorporation
- Adoption of antitakeover charter amendments
- Managerial opposition
- Going private transactions
- Standstill agreements
- Large block repurchases
5. Hubris means that managers suffer from too much self-confidence, which makes them more
likely to overpay for a target firm.
6. The current market price; any bid above the market price represents an error.
7. One would expect:
- A price decline on announcement of the bid
- A price increase on abandoning/losing the bid
- A price decline on winning the bid (winners curse)
8. Takeover motives are:
- Poor target management
- Synergy
- Hubris
9. They use three core variables, namely: (i) recent firm performance, (ii) recent media praise for the
CEO, and (iii) a CEOs self-importance (reflected by his pay versus the pay of other executives). All of
these positively contribute to a managers hubris.
10. The three factors are:
- Number of insiders on the board
- Whether or not the CEO is also the boards chair
- Stockholdings of outside board members
11. The social benefit (in which everyone shares) is larger than the social cost (for which the raider is
fully responsible).
12. They can:
- Allow the raider to pay himself a large salary

- Allow the raider to issue stocks to himself

- Allow the raider to sell assets at depressed prices to one of his other firms
- Allow the raider to sell outputs at depressed prices to one of his other firms
13. Differences in valuation of firm value and post-takeover improvements between tendering
shareholders and the raider. This could be due to differences in risk preferences or information
asymmetry.
14. Yes, it produces a constant takeover threat and thereby forces management to manage a firm
as efficient as possible.
15. Small shareholders can favour a financial policy that proposes dividend payments, even though
they prefer capital gains. They do this because they value the monitoring efforts of the large
shareholder.
16. The jawboning mechanism is an informal, costless, and less effective way of forcing
management to take certain actions. It also signals small potential improvements. This
automatically means that when someone tries to takeover a firm, the improvement has to be large;
this will lead shareholders to think that they can benefit from the improvement made by the raider
and they dont tender their shares (or require a larger premium), thereby decreasing the likelihood
that the takeover will be successful.
17. Because it decreases the likelihood of success and it makes a takeover more expensive.
18. Bid one cent above the post-takeover value.
19. The 90s wave suggests poor returns because of higher stock valuations, greater use of equity
and more takeover defences. A reason for better returns is the increased importance of option
packages as managerial compensation; this makes managers more involved in assessing whether
or not a takeover really adds value.
20. Because large loss deals primarily took place within industries.
21. Market value as a function of technology.
22. Gaming the system means that managers play the earnings management game, which
involves fraudulent practices and/or value-destroying takeovers simply to perform in line with their
(often short-term) targets.
23. Because it is hard (read: impossible) for investors to acquire overvalued firms, undo the
overvaluation and make a profit by selling the firm.
24. Good control and monitoring systems need to be in place, regular communication with short
sellers (as they are the criticasters) and talking the stock price down by being honest to investors;
enduring short-term pains for long-term gains.
25. An industry shock is any factor, expected or unexpected, that alters industry structure, which is a
function of technology, regulation, demand and supply.
26. Examples of industry shocks are:
- Deregulation
- Foreign competition
- Changes in input prices

- Technological advancement
- Energy dependence
- Financial innovation
27. The neoclassical theory assumes that mergers are a reaction to industry shocks, whereas the
behavioural theory says that mergers are a result of market timing and overvalued stocks.
28. Capital liquidity, which translates to low transaction costs.
29. Firms increase in value because:
- Enhancement in operating performance
- Better market valuation when private
- Leverage increases the tax shield