The battle for corporate control and share class structure : an experimental approach

Abstract

In this paper, we test the theoretical conclusions of Grossman and Hart (1988) using an experimental approach. They concluded that one-share-one vote promotes value-increasing takeovers and discourages value-decreasing takeovers compared to the dual class share structure. Four treatment variations were designed to investigate the effect of both dimensions (efficiency of management and share structure) on the likelihood of takeover. A computerized continuous double auction and unrestricted tender offer stock market was set up in which an incumbent and a raider competed for control of the firm. Our experimental results were the opposite of the predicted outcomes, which implies that one-share-one-vote may not be optimal. It also shows that the effects of certain factors were not considered by Grossman and Hart (1988). Phenomena such as winner’s curse and narrow bracketing may have occurred, which may also partially explain the deviation.