Share class structure and the efficiency of corporate takeover : experimental evidence

• Main Authors: Lee, Pei Xuan, Siow, Zu Er, S, Roshini
• Other Authors: Bao Te
• Format: Final Year Project
• Language: English
• Published: Nanyang Technological University 2020
• Subjects: Social sciences::Economic theory
• Online Access: https://hdl.handle.net/10356/137439
• Institution: Nanyang Technological University

This research paper empirically tests the theoretical models predicted by Grossman and Hart (1988) through an experimental approach. They examined the efficiency of one-share-one-vote share structure and dual class share structure on efficient takeover. They concluded that one-share-one-vote share structure promotes value-increasing takeovers by an efficient Raider and discourages value-decreasing takeover by an inefficient Raider. In this paper, four treatment variations, involving tender offers, were designed to investigate the effect of different share structures and efficiency of Incumbent and Raider on the takeover outcome. Our experimental results demonstrated that it was less likely for an inefficient Raider to successfully takeover in an one-share-one-vote share structure. This result is in line with the theoretical predicted outcomes. On the other hand, in the case of an efficient Raider, our results were not in line with the theoretical model for the case of an efficient Raider. Under an efficient Raider, successful takeovers and defence were equally likely to occur in both share structures. In sum, our results suggest that while the one-share-one-vote share structure may be optimal to prevent takeover by an inefficient Raider, it may not be of much help for a successful takeover by an efficient Raider. Smaller price bubbles were also found in one-share-one-vote share structure, which is in line with the theory’s prediction. Winners of tender offer were also observed to purchase a greater proportion of shares in one-share-one-vote share structure as compared to dual class share structure. In all, our paper contributes to existing literature, in terms of providing clean evidence on the theoretical benefit of one-share-one-vote share structure.