Oneil Harris

Governance, type of blockholder, and negotiating power in takeovers

Purpose - – Agency theory suggests that if managers are not monitored, takeover negotiations may be contaminated by agency conflicts, which may weaken a firms bargaining position. This paper argues that some blockholders are more effective monitors than others, and tests whether the negotiating power of a target or bidder is influenced by their respective blockholder composition. The paper aims to discuss these issues. Design/methodology/approach - – This paper classifies target and bidder outside blockholders as either aggressive monitors or moderate monitors, and tests whether the degrees of monitoring effectiveness influence a firms share of the total wealth created by the takeover (a proxy for bargaining power). Findings - – This paper finds that firms that have the types of outside blockholders with a greater tendency to monitor managers elicit higher takeover gains. This suggests that negotiating power in takeovers is conditioned on the types of blockholders that monitor the target and bidder. The results support the premise that better monitoring leads to higher gains for shareholders in a takeover. In particular, the findings suggest that the greater the tendency of outside blockholders to monitor managers, the lower the level of takeover-related agency conflicts and the stronger a firms relative bargaining power. Originality/value - – These findings imply that agency conflicts on either side of a takeover bid may be reduced by better monitoring, but especially among bidders.

On the sensitivity of the Black capital asset pricing model to the market portfolio

We show that Black Capital Asset Pricing Model (Black CAPM) is extremely sensitive to the choice of the market portfolio and becomes unstable as market portfolios approach the Global Minimum-Variance portfolio. When market portfolios approach the minimum-variance portfolio, the expected return on the zero beta asset approaches negative infinity and its variance increases rapidly. Moreover, expected return on a fixed portfolio becomes indefinite (i.e., takes infinitely many values), and betas of all portfolios approach one. Unlike the Sharpe-Lintner CAPM, the market risk premium in the Black CAPM always has a positive minimum, while beta may have a negative minimum value, dependent on the underlying covariance matrix.