vorking paper department of economics Breach of Trust in Takeovers and the Optimal Corporate Charter

This paper analyzes how takeovers and takeover defenses affect the value of target companies, using an incomplete contracts framework. We consider a raider who intends to improve the efficiency of production and to appropriate the rents enjoyed by stakeholders of the company. Anticipating this rent shifting the stakeholders invest too little in relationship specific assets which may offset the ex post value increase. Our main focus is on how the corporate charter should be designed to mitigate these inefficiencies. We show that shareholders can use poison pills and golden parachutes to solve the underinvestment problem without forgoing profitable takeovers. JEL Classification Nos.: 026, 611, 511.