Financial Arbitragers and the Efficiency of Corporate Control

Abstract

The purpose of this paper is to show that efficient corporate control can be maintained in the absence of large shareholders, provided that there exist active arbitragers in a properly functioning funancial market. To illustrate the point, the focus is on the contest for corporate control, in which arbitragers, who buy large amounts of shares after a takeover announcement, become temporary large shareholders of the firm. It is shown that the presence of these temporary large shareholders makes otherwise impossible takeovers successful. the model also explains a range of widely observed phenomena in the contest for corporate control, including the relationship between jumps in share price and those in trading volume. the optimal takeover premium is shown to be a fixed portion of the value improvement which the takeover can realize. This division rule implies that the market for corporate control can be efficient, thanks to the participation of arbitragers. The importance of financial markets and arbitragers for corporate control is emphasized in the context of large scale privatization.