Document Type
Article
Publication Date
7-1-2005
Abstract
We compare the efficiency with which management discretion and shareholder choice regulate hostile tender offers. This is the first paper in a long running debate that rigorously compares these legal rules to analyze both the critical informational assumptions and the interplay of those assumptions with principles of financial market efficiency. A critical innovation of our model is its focus on an informed management’s choice among alternative corporate policies under the protection of the business judgment rule, but where agency costs exist. We assume that corporate assets and reinvestment opportunities are efficiently priced by financial markets, but that markets never learn the value of foregone investments. In this case, shareholder choice may create an agency problem whereby managers forego positive net present value investments that increase the risk of a hostile bid. We are able to determine analytic conditions under which the expected cost of this agency problem exceeds that of the standard agency problem usually identified with management discretion.
Keywords
Management Discretion, Business Judgement Rule, Market Efficiency
Repository Citation
Kihlstrom, Richard E. and Wachter, Michael L., "Why Defer to Managers? A Strong-Form Efficiency Model" (2005). All Faculty Scholarship. 70.
https://scholarship.law.upenn.edu/faculty_scholarship/70
Included in
Business Organizations Law Commons, Corporate Finance Commons, Law and Economics Commons
Publication Citation
Preliminary: Not to be Quoted without Permission from the Authors