The Market For Corporate Control: The Transaction And Governance

The market for corporate control is originated from an article entitled "Mergers and the market for corporate control" written by Manne in 1965. Manne criticized the traditional method, i.e. firms are only regarded as a production function, by which mergers were studied. He argued that the control of corporations may constitute a valuable asset, that this asset exists independent of any interest in either economies of scale or monopoly profits, that an active market for corporate control exists, and that a great many mergers are probably the result of the successful workings of this special market. He further proposed that the study of the market for corporate control has important implications for a variety of questions including antitrust, especially the most is for the alleged separation of ownership and control in large corporations. From then on, many famous financial economists, for example, Jensen, Ruback, Grossman, Hart, Dodd, Harris, Asquisth, Mullins, Bradley and Stulz, began to pay more attention to the study of the market for corporate control. These economists argued that external controls such as mergers and acquisitions of the corporations are more efficient than internal control. Over the past twenty years, hundreds of papers about the market were published in top financial journals around the world, and the market is still the candidate theme for the doctorial dissertations in America.With the development of capital market in China, the transaction volume of the mergers and acquisitions of listed corporations is drastically growing. Zhang Xin(2003)reported that 1216 mergers and acquisitions took place in the period 1993 to 2002, out of which 724 have changed the control rights of listed corporations. Though there have been a lot of literatures on M&A in China, very few articles directly focus on the market for corporate control. The existing theoretical and empirical researches limit to the analysis of the cause, consequence and meaning of the market, but place few emphasis on the microeconomics of transaction process of the market. In the paper, my study focuses on transaction characteristics of the market such as the method of payment and acquisition method, the supervision of the market transaction, and the interest conflict between the shareholder and management when the corporate control changes. These issues have not been deeply studied by the internal scholars. The paper is composed of three sections and organized as follows.Section 1 briefly analyses the theoretical basis, governance effect and the limits of the market for corporate control, discusses some of the literatures that relates to the wealth effects of the market and their influential factors, and gives some advices on the direction of further research. Especially, 1 describe the structural difference in the corporate control market in America from the early 1980s to the late 1990s and itscauses.Section 2 constitutes two chapters, each of which concerns the micro and macro aspects of the market transaction respectively. The third chapter compares the different wealth effects on shareholders between tender offer and merger, which are the most important mechanisms of corporate control fight. Then the rest of the chapter models the choice of tender offer and merger, the method of payment under asymmetric information. At last, I compare the method of payment across China, America and England. The fourth chapter focuses on the economics of the supervision rules of the market transaction including corporate laws, antitrust, disclosure requirement, the rule of tender offer and mandatory bid.Section 3 also constitutes two chapters, which concerns the interest conflict between the shareholder and management when the corporate control changes. The fifth chapter discusses the relevant literatures, analyzes the behavioral preferences of target firms' managements faced with external takeover threats. These preferences are reflected by the balance of the resulting various interests of the takeover of the target firms and have important influences on the activity, the probability of success and takeover premiums. In the sixth chapter, I present the empirical findings of the relationship between the governance structure and the corporate control market in China. I find no evidence that the managerial ownership have actual effect on the market, the reason for which is that the managements have few shareholdings and Chinese government dominates the market for corporate control. But on the other hand, I report that not only the cash compensations but also the fractions of independent directors on the board play an active role in the market. At last, I overview the managerial incentives, including ownership and golden parachute payments and think that the proper increase in managerial ownership, compensations for the managerial turnover associated with the change in target firms' control have an active impact on the development of the market for corporate control.The last chapter contains concluding remarks, the limitation and further research direction.