Abstract
This paper analyzes how takeovers, various takeover defenses, and golden parachutes affect the value of target companies using an incomplete contracts framework. The author considers a raider who can improve the efficiency of production and appropriate rents of stakeholders of the company. Anticipating the expropriation of his rents, the manager’s relationship specific investments will be too small, which may offset the value increase through the takeover. The simultaneous use of poison pills and golden parachutes can solve the underinvestment problem without forgoing profitable takeovers. However, the privately optimal level and composition of takeover defenses need not be socially efficient. Copyright 1995 by Blackwell Publishing Ltd.
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