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European Finance Review 1999 3(1):1-22; doi:10.1023/A:1009829729075
© 1999 by European Finance Association
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Right arrow G14 - Information and Market Efficiency; Event Studies
Right arrow G31 - Capital Budgeting; Fixed Investment and Inventory Studies
Right arrow G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
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The Market for Corporate Control and the Agency Paradigm*

Norvald Instefjord

Department of Economics, Birkbeck College, University of London 7–15 Gresse Street, London W1P 2LL Tel.: +44 (0)171 631 6407; Fax: +44 (0)171 631 6416; E-mail: ninstefjord{at}econ.bbk.ac.uk

The paper analyzes the role of agency driven takeover activity. The analysis shows that takeovers can play an important role in reducing agency costs even though the gains from the corporate restructuring that follows the takeovers are zero, which counters existing models of agency driven takeover activity. The model can therefore form the basis for deriving empirical predictions which discriminate between the "agency paradigm" and the "corporate 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 target's 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. JEL numbers: G14, G31, G32, G34.

Key Words: Agency paradigm • market for corporate control • mergers and acquisitions • takeovers


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