The Evolution of the Market for Corporate Control

In a canonical takeover model we let an informed large shareholder choose between making a bid or initiating a sale to another acquirer. Such takeover activism complements direct takeovers because the very choice mitigates the asymmetric information problem, thereby improving efficiency. As more investors enter the market for corporate control, takeover activism increasingly substitutes for direct takeovers and becomes the prevailing mode of effectuating control changes. Our theory thus proposes that investor activism has not superseded disciplinary acquisitions but instead brought about a new modus operandi: takeover activism, characterized by a symbiotic relationship between private equity and activist hedge funds.