Takeover Threats and Managerial Myopia

Abstract

This paper examines the familiar argument that takeover pressure can be damaging because it leads managers to sacrifice long-term interests in order to boost current profits. If stockholders are imperfectly informed, temporarily low earnings may cause the stock to become undervalued, increasing the likelihood of a takeover at an unfavorable price; hence the managerial concern with current bottom line. The magnitude of the problem depends on a variety of factors, including the attitudes and beliefs of shareholders, the extent to which corporate raiders have inside information, and the degree to which managers are concerned with retaining control of their firms.