The probability of a successful takeover increases with GP or golden parachute, argues Jeong Hun Oh in Do Golden Parachutes Increase Shareholders' Wealth in the M&A between ICT Companies?(www.ssrn.com) . For starters, GPs are contracts between target management and shareholders promising some compensation to the managers when they have to leave the firm after it is successfully acquired, as a footnote in the paper explains.

“Here, we consider a contract which pays some portion of takeover premium in the event that a change of control occurs. One example is through stock options which result in some payoffs to the target manager because of a higher stock price after successful M&A.”

The author notes that GP can make the managers' self-interested anti-takeover techniques beneficial to the shareholders of target firm. The basic idea, one learns, is that without an appropriate level of compensation, managers resist the takeover offers in order to retain their control which potentially harms shareholders.

Another interesting feature of GP highlighted in the paper is that target managers can in certain cases defeat bids that are inadequate and promote the takeover premium by extracting a higher offer price from the bidder.

The paper wraps up by reminding that different types of defensive strategies may cause different results. “For example, some defensive strategies like corporate charter amendments, capital structure changes, and voting trusts are usually established before the takeover announcement. Since the acquiring firms can observe those defensive strategies, they may be able to calculate more accurate takeover costs.” In contrast, defensive strategies such as ‘standstill agreements, green mail, and poison pills' are usually established after the takeover announcement.

Insights of value.

Local bias

Those in the world of investment have heard enough and more about the benefits of diversification. Yet, broad empirical evidence suggests that investors tend to invest in companies with headquarters close to their geographical locations. This phenomenon is named the home bias puzzle when referring to international investment, and the local bias puzzle when referring to domestic investment in the extant literature, informs Local Bias of Investor Attention: Evidence from China's Internet Stock Message Boards by Zhiguo Wu and Huiyan Qiu (www.ssrn.com) .

Going into the why of such bias, the authors find that the culprit is investor attention.

People are used to selecting options that attract more of their attention when they face the problem of choosing from lots of alternatives, the paper explains. “For those options that cannot attract them at all, people often choose to just ignore. That is, attention confines the choice set at the first step, after that preference determines choices.”

Recommended read.

comment COMMENT NOW