| Chapter I addresses the adverse selection issue of whether and when the control of a firm can be allocated to its truly highest valuator, in the context of a takeover mechanism design problem with incomplete information. A fairly natural notion of corporate control is proposed to study the feasibility of efficient takeover mechanisms. We find that firms with either very small or very large initial controlling interests are difficult to be taken over efficiently ex-post. The concept of versatile takeover mechanisms is then introduced. A versatile mechanism is one that allocates the control of the firm to the truly highest valuator whenever it is possible to do so, irrespective of the existing ownership structure. We then characterize the conditions for the existence of a versatile takeover mechanism.; We find that a greenmail premium, the resulting fall in the stock price not withstanding, is quite consistent with an ex-post efficient takeover, but only when flat subsidies, in the form of, say, liquidating dividends, are paid. These subsidies, in turn, are found to preclude efficient takeover of certain marginal firms where efficiency could have been achieved without subsidies. We also find that raiders with the lowest valuations can sometimes expect to receive the largest greenmail premiums, even in efficient takeovers.; In Chapter II we propose an economic rationale for pure diversification mergers, based on the incentive problems arising from oral hazard (agency) issues. It is shown that reducing the risk in the earnings of a firm through diversification improves the total welfare in the presence of agency costs. |
