Takeovers and The Stock Market

Abstract

In a market economy the stock exchange has a triple role, first to pool together society’s savings dispersed among individual savers; second to channel selectively these savings to companies with the best investment prospects, and third to encourage the efficient use of assets embodying past savings. Two interrelated mechanisms are involved. A primary market mechanism, whereby new issues of shares are made by companies wishing to raise funds, and a secondary market mechanism whereby trade in the existing shares of companies is carried out. A company whose equities are traded at a relatively low price will find it relatively expensive or impossible to raise new funds in the primary market. It may also be subject to the threat of a takeover in which a majority ownership stake in its equity is acquired by another company whose objective is to change policies to improve the stock price. Management teams may thus compete in a market for corporate control, and takeovers may then be interpreted as a central part of the stock market selection process. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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