The determinants of hostile takeovers and the efficiency of the market for corporate control

A major attribute of the United States capital markets is an active takeover market. Hostile takeovers allow for monitoring by creating the threat that management loses control of the firm. This dissertation examines the efficiency of the market for corporate control with respect to two characteristics of potential targets: cash holdings and institutional ownership.;Conventional wisdom asserts that firms which hold large amounts of cash are likely targets. Using a sample of hostile takeovers from 1985--1994 and quarterly data, I find the probability a firm is acquired is decreasing in cash holdings. This result holds for firms with too much cash as well as those with poor investment opportunities. Cash decreases the probability of acquisition by deterring potential bids, and may provide firms with the time to find a white knight once targeted. Additionally, cash holdings do not increase bid premiums and decrease following passage of state antitakeover legislation. These results imply that managers may hold cash to entrench themselves at the expense of shareholders. Consequently, I do not find that hostile takeovers monitor corporate cash holdings. Rather, cash holdings appear to decrease such monitoring.;Ownership of shares by institutions has increased dramatically. A debate has arisen arguing whether institutional investors are monitors or transient investors. I examine whether institutions can increase monitoring by acting as transient investors through their impact on the market for corporate control.;I find that firms with more of their shares in the hands of institutional investors, primarily mutual funds, are significantly more likely to be hostile targets. Further, it is the aggregate level of ownership, not the concentration that drives the result. The result does not obtain because institutions are better able to predict takeover targets, rather, the change in institutional ownership is negatively related to takeover probability. Hence, institutions are selling in the quarter prior to the takeover announcement. I also find that bidders offer higher initial premiums for firms with greater institutional ownership, although they seem less likely to raise their bids. It seems that in such cases, high bids are an attempt to preempt competitors from entering the contest.