The Market for Corporate Control and the Agency Paradigm *

Abstract

The paper analyzes the role of driven takeover activity. The analysis shows that takeovers can play an important role in reducing costs even though the gains from the cor- porate restructuring that follows the takeovers are zero, which counters existing models of driven takeover activity. The model can therefore form the basis for deriving empirical predictions which discriminate between the agency paradigm and the restructuring paradigm of takeover activity. Negative post-merger performance (Agrawal et al., 1992), which is inconsistent with corporate restructuring is consistent with this model, and that takeover targets' investment levels are below or at the average (Servaes 1994), which is inconsistent with the free cash flow theory is also consistent with this model.