Agency costs in the market for corporate control: evidence from UK takeovers

Abstract

Purpose: This paper examines whether agency costs predict disciplinary takeover likelihood for UK listed companies between 1986 and 2015. Design/Methodology/Approach: Using survival analysis, our approach is to identify candidates for disciplinary takeover on the basis of Tobin’s Q (TQ), which is consistent with the approach advocated by Manne (1965). We then examine how indicators of agency costs affect takeover likelihood within the set of disciplinary candidates. Findings: We provide evidence of the effectiveness of Tobin’s Q, rather than excess return, in identifying disciplinary takeover candidates. Takeover hazard for disciplinary candidates is higher for companies with higher levels of asset utilization and sales growth in particular. Companies with stronger agency problems are relatively less susceptible to disciplinary takeover. Practical Implications: Given the UK context of our study, where anti-takeover provisions are disallowed, and when compared to findings of US studies, our results imply some support for the effectiveness of an open merger policy. Originality/Value: While the connection between takeover likelihood and the market for corporate control has been made in previous studies, our study adopts a more explicit agency theory framework than previous studies of takeover likelihood. A key component of our contribution follows from differentiating candidates for disciplinary takeovers from other forms of M&A.