Learning about Managerial Entrenchment in Dynamic Hostile Takeovers

45 Pages Posted: 4 Jun 2020 Last revised: 9 Dec 2020

See all articles by Zehao Hu

Zehao Hu

Uber Technologies Inc.

Chong Huang

University of California, Irvine - Paul Merage School of Business

Date Written: December 8, 2020

Abstract

This paper shows that an acquirer's learning speed about target managerial entrenchment determines the effectiveness of hostile takeovers as disciplining devices. In a dynamic setting, an acquirer keeps collecting information about the degree of target managerial entrenchment and thereby learns it ultimately; the target manager may resist a bid to build a reputation of being strongly entrenched, which deters future bids. A slow-learning acquirer never bids in equilibrium, implying that economic factors that continuously keep target managerial entrenchment transparent are necessary in order for hostile takeovers to incentivize entrenched managers to focus on shareholders' best interests. A fast-learning acquirer bids frequently and experiences alternations between tranquility phases and bidding phases. We also derive a strong reputation result: the target manager receives her "commitment payoff," even if the acquirer is infinitely more patient.

Keywords: Dynamic hostile takeover, managerial entrenchment, reputation, learning

JEL Classification: G34, D82, D83, C73

Suggested Citation

Hu, Zehao and Huang, Chong, Learning about Managerial Entrenchment in Dynamic Hostile Takeovers (December 8, 2020). Available at SSRN: https://ssrn.com/abstract=3595868 or http://dx.doi.org/10.2139/ssrn.3595868

Zehao Hu

Uber Technologies Inc. ( email )

1455 Market St
San Francisco, CA 94103-1331
United States

Chong Huang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

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