The effects of antitakeover provisions on managerial performance

The principal-agent problem is a long-lived, inherent problem of corporations. Its simply states that the interests of managers and the interests of the owners of the firm may not be the same. There have been several devices invented to align the interests of both parties. One of the devices is the compensation package. A manager's compensation package usually includes salary, bonus, and stock options. Other devices are board composition, debt leverage, managerial ownership, block ownership, and takeovers.

This dissertation focuses on the takeover mechanism. The market for corporate control is believed to stand ready to solve potential agency problems. If managers do not act in the interests of shareholders (i.e., maximizing shareholder wealth) a raider would step in and make necessary corrections. The function of the market for corporate control is even more vital if one regards the future as full of uncertainties. Provided that the future is uncertain, self-disciplining mechanisms such as the compensation package would not be effective since it is impossible to specify every possible event in the contract between managers and shareholders. This possibility promotes the market for corporate control as the control of last resort. If all else fails, it will act to align the interests of managers and owners of the firm.