Question

What is the role of takeovers in corporate governance?

How does asymmetric information between very knowledgeable corporate insiders and less knowledgeable, but rational, outside investors discourage raising equity through selling new shares to the public?

Answer 1

A. Takeover is an important phenomenon in corporate governance because takeover would be leading to solving up with the problem of agency problem between managers and shareholders to a large extent because takeover will mean that managers will be trying to work in the interest of the shareholders because they are fearful that their job will be lost once company is been taken over.

Takeover will also help in better corporate management because if takeover is done by the company rather than being taken over, then it will help the company in order to maximize its strength and maximize its market share along with it will have an economies of scale along with better employee culture and integration of different culture.

B. Assymmetric information between knowledgeable corporate insider and outsider are always leading to issuance of shares at higher price which will be providing advantage to the insider and it will also mean that inside will onload higher amount of shares and they will be offoading in market once the premium has been discounted into the price, so it is ultimately the loss of the investor's because retailers are fooled by the corporate inside as and they are raising the price target in order to fetch a higher money for their issue and it is ultimately the loss for the subscriber of those shares and hence it can be said that these shares should not be issued at at Higher premium because that is reflecting asymmetric information rather it should be issued at close to intrinsic value which will provide the investor with a better chance of maximizing is rate of return.