Encuestas a Restaurantes de Mariscos de la Ciudad de Guayaquil

2.5.1 Empirical predictions

Our analysis offers a number of testable empirical predictions. Some of the most salient predictions concern the stock sales during the offer period or, equivalently, shareholder turnover, which get to the heart of the interrelationship between the Board and the shareholders. Our results also have testable implications relating Board entrenchment and takeover outcomes. The predictions we would highlight are:

premium.

2. On average a greater proportion of shareholders sell during the offer period where managerial Boards have more discretionary power to resist takeovers.

3. Bids from uncontested acquisitions for firms with more resistant Boards are higher on average, and yet have lower completion rates.

The link between the bid premium and stock sales during the offer period is delivered by result 5 of Proposition18. The prediction that regimes where man- agerial Boards enjoy great discretionary power to oppose takeovers, that is regimes with a low κ, should see more selling during the offer period is delivered by result 5 of Proposition19. Both of these predictions concern the likely order flow during the offer period. Data exists on order flows and therefore the first prediction is potentially practically testable, though we are not aware of a test of the hypothesis existing. The second test involves comparisons across jurisdictions whilst controlling for shareholder rights verus the discretionary power of managerial Boards. Alterna- tively one could also compare takeovers across companies with different corporate charters within the same jurisdiction. Once again we are not aware of existing tests of the hypothesis. Constructing measures of shareholder rights is challeng- ing; though La Porta et al. (1997) offer a blueprint. This second test is therefore approachable in principle.

The third prediction concerning the expected takeover resistance on acqui- sition premia, and on the probability of success, is delivered by results 1 and 2 in Proposition 24. A natural way to implement a test is to posit that entrenched Boards can extract greater rents from their firm in terms of high pay. Bebchuk et al.

(2009) argue that this is a valid inference to make. The prediction would therefore be a joint hypothesis that uncontested (and therefore strategically priced) bids for firms where managers are overpaid will be bids for firms whose managers are en- trenched, and so will result in higher offer premia on average and yet succeed less

frequently. Our prediction is in line with evidence of a relation between managerial entrenchment and the probability of deal failure (e.g. Bebchuk et al.,2002); though it is in contrast to results that find no significant effects (e.g. Heron and Lie,2006;

Bates et al.,2008). Consistent with the hypothesis that Boards resist in the interest of shareholders, Comment and Schwert (1995) and Bates and Becher (2016) find that takeover defences increase bidding premia, as we predict.

2.5.2 Alternative Settings and Robustness

This section considers the robustness of our results to two variations of the bench- mark model.

Cross-Ownership. In some cases target shareholders own stock of the bidding firm. If the takeover succeeds, these shareholders receive an additional payoff (either positive or negative) that accounts for the effect of the takeover on the bidder’s stock. Appendix 2.8.1studies this setting. We show that despite the change in the payoff function, the strategic interaction between shareholders and so our analysis is not materially altered. Intuitively this follows as each shareholder’s buy or sell decision is negligible on the probability of takeover success as each shareholder is assumed to be small; thus the strategic decision on whether to buy or sell can be divorced from changes in the value of the holding in the bidder. As a consequence Proposition 17 holds, and hence our results continue to hold as stated and are entirely robust to portfolios of ownership.

Informed External Investors. We assume that sophisticated shareholders are better informed about the firm they own than other investors. As noted above this assumption seems to us natural as sophisticated shareholders, having been owners of the stock for a period of time, will have developed some knowledge of the preferences and practices of management. This assumption has the implication that sophisticated shareholders have positive expected returns. However, as noted in the Introduction, the acquirers of the stock during the offer period are often risk

arbitrageurs or hedge fund activists which are also likely informed and appear to make positive profits (seeMitchell and Pulvino,2001 and references therein).

Appendix 2.8.2considers an alternative information structure privileging ex- ternal investors. In this appendix we assume that the potential buyers of stock receive private signals about the Board’s type. In turn we assume that existing shareholders and market markers can only act on the common prior. It there- fore follows that current shareholders will buy or sell in the offer period purely on whether the external investors are willing to pay above the ex ante expected price for the stock based on publicly available information. That is outside investors face completely elastic supply at the market priceM.

We solve this alternative formulation in Appendix 2.8.2. This setting is one of strategic complementarities for external investors, as their expected payoff from acquiring stock increases with the stock owned by other investors.14 Despite the new information structure, both the probability of a takeover and the interim stock value react to changes in the fundamentals as in Propositions 18, 19, and

20. However the relationship between the stock sales during the offer period and the fundamentals is reversed. If external investors have better information than current owners of the stock then their inferences when the Board’s threshold type changes are more sensitive than those of market makers and existing shareholders. For example, if the bid price rises, this acts to raise the Board’s critical threshold and make the takeover more likely to succeed. The market price therefore rises, but further profits can be made by the party with the better information. If this party is the external investors then they buy more of the stock and so lead to an increase in the shareholder turnover during the offer period, not a reduction as in Proposition

18.

Whether our benchmark formulation giving an information advantage to ex- 14

The complementarities between external investors are similar, in spirit, to those studied inBrav et al.(2016), which represents the cost of engaging entrenched management to increase firm value. Our paper shows that in this situation, the game of strategic complementarities for stock acquirers is a game of strategic substitutes for sellers.

isting sophisticated shareholders is appropriate is ultimately an empirical question. As we noted above the empirical evidence on the relationship between the order flow in the offer period and the fundamentals we study is still in its infancy, and so the most appropriate formulation remains a matter of conjecture.