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TAKEOVERS: MANAGERIAL INCOMPETENCE OR MANAGERIAL SHIRKING?
Author(s) -
GRIFFIN JAMES M.,
WIGGINS STEVEN N.
Publication year - 1992
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1992.tb01663.x
Subject(s) - restructuring , agency (philosophy) , free cash flow , economics , shock (circulatory) , principal–agent problem , cash flow , agency cost , microeconomics , workforce , finance , shareholder , corporate governance , medicine , philosophy , epistemology , economic growth
Agency theory identifies managerial shirking as the cause for takeovers, while other explanations focus on low ability managers. This paper formalizes Jensen's free cash flow variant of agency theory by constructing a simple two‐period game which captures the distinctive empirical implications of the two theories. Using data for petroleum firms following the oil price shock of 1979‐80, we find that firms undergoing financial restructuring exhibited higher values of Tobin's q. Additionally, evidence of management turnover and workforce cuts emphasizes that takeovers appear primarily designed to address agency concerns.