Mergers and the Market for Corporate Control: The Canadian Evidence

B. Espen Eckbo

75 citations0/0 files storedCanadian Journal of Economics/Revue canadienne d économique

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Corporate Finance and Governance Financial Markets and Investment Strategies Merger and Competition Analysis

Abstract

The proposition that a competitive market for corporate control effectively limits managerial divergence from shareholder wealth maximization implies that corporate takeovers are beneficial to shareholders of both firms involved in the transaction. This paper presents the first systematic large-sample study of the valuation effects of Canadian mergers and concludes that these investments indeed create significant gains to shareholders of both bidder and target firms. This evidence, which is particularly interesting in light of extant evidence on the performance of u.s. bidder firms, indicates that the Canadian market for corporate control plays an important role in promoting an optimal resource allocation.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1980Agency Problems and the Theory of the Firm 1933The Modern Corporation and Private Property 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1983The market for corporate control 1986The Hubris Hypothesis of Corporate Takeovers 1972Capital Market Equilibrium with Restricted Borrowing 2003The Adjustment of Stock Prices to New Information

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