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MARKET FOR CORPORATE CONTROL

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Definition:
In an economic system where the voting stock (shares) of companies are publicly bought and sold through the mechanism of a stock exchange, the term "market for corporate control" refers to the process by which ownership and control of companies is transferred from one group of investors and managers to another.

The share prices of companies publicly listed on the stock exchange are often viewed as a "barometer" indicating the extent to which management is efficiently operating the corporation and maximizing shareholder wealth.

Context:
Generally speaking, investors or shareholders delegate substantial authority to professional managers who are hired to make the company’s day-to-day pricing, production, investment, marketing and other business decisions. However, shareholders may not always be in a position to monitor or oversee these decisions, particularly if there are a large number of such shareholders. Under these circumstances, the company managers may not necessarily take decisions that maximize shareholder wealth. They may choose to shirk their duties by pursuing their own personal goals such as avoiding risk, maximizing their pay and fringe benefits, and spending money on prestige projects.

Depending on the available information, the share prices of the company will be valued low and this would create incentives for takeover by a more efficient group of managers and shareholders. By taking control and subsequently changing management or management practices and reallocating resources, the assets of the acquired company may be put to more highly valued uses. The "market for corporate control" along with competition in the markets for products and services play an important role in reinforcing each other in promoting efficiency.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Takeover

Hyperlink:
http://www.oecd.org/dataoecd/8/61/2376087.pdf

Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Friday, March 7, 2003