Making Sense of the 1980s and 1990s

This paper describes and considers explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. We conclude by considering whether these changes and the movement toward shareholder value are likely to be permanent. Bengt Holmstrom is the Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology, Cambridge, Massachusetts. Steven N. Kaplan is Neubauer Family Professor of Entrepreneurship and Finance, Graduate School of Business, University of Chicago, Chicago, Illinois. Both authors are also Research Associates, National Bureau of Economic Research, Cambridge, Massachusetts.