Junk bonds, hostile takeovers and the market for corporate control

Early studies of takeover activity in the 1960s and 1970s showed that takeovers as a means of corporate governance were not efficient. These studies showed that capital market constraints limited large firm takeovers and that takeover targets were not necessarily poor performers. Furthermore, takeovers did not improve efficiency in the years following the takeover. However, changes in financial markets and takeover techniques in the 1980s led some researchers to believe that takeovers could remedy the problems introduced by the separation of ownership and control by imposing discipline on inefficient management. For example, junk bonds provided the flexibility and capital resources needed to finance large firm takeovers and hostile takeovers enabled acquiring firms to discipline inefficient management through the tender offer. This dissertation provides empirical evidence on these matters.; The objectives of the dissertation is to answer the following questions: Have hostile takeovers financed by junk bonds improved the disciplinary mechanism of capital markets in the 1980s? Have takeovers become more value enhancing by improving the efficiency of resource utilization? The dissertation uses data from a sample of hostile takeover targets, their acquirers and random samples of firms not acquired during the 1984 to 1989 time period of the study.; The results of the empirical study indicate that although junk bonds made many of the acquisitions in the 1980s possible, they did not alleviate the capital market imperfections in the selection of takeover targets. The study found that subjects of hostile takeovers generally had low market valuations and were slow growers, but were not necessarily poor performers when compared to other firms in their industry. Furthermore, the performance of the acquiring firms significantly deteriorated in the three years following the acquisition. The results indicate that changes in takeovers and capital markets in the 1980s did not strengthen the market for corporate control and the evidence supports the controversial policies of the late 1980s and early 1990s restricting hostile takeovers and the use of junk bonds to finance takeovers.