Large creditors

- If is it an institution that has invested substantial funds—create an incentive to monitor the

activities of the firm. E.g- loan—they would want to monitor the activities to ensure that it
gets paid
- KNOW HOW CREDIT RISKS CAN BE MANAGED
- The ability of large creditors to exert large influence is derived from the control rights they
receive . e.g- if they firm is called to pledge fairly large collateral – when the firm does not
adhere to pledge—they large creditor can take firms large assets when they default on their
payments
- Other option: throw the firm into bankruptcy.
- Role over short term lending only if the firm is honoring its financial commitments. Because
financial institution is lending at short term  firms have to return at intervals for funds.
- Debt overhand reduces the free cash flow and allows management to focus on the firms
performance (reduce agency cost)

Relationship based system of corporate governance- Japan & Germany—banks goes beyond arm
length transaction with company—banks are allowed to take equity positions in companies.
Dominant investors and providers of funds—where the arms length transactions rule—they are
called Main Banks. This makes those Main banks all the more powerful  direct representation 
supervisory boards—dominant in ending, and significant equity position. This makes these Main
banks effective monitors of the firm.

Negative

- The influence of large creditors might harm rather than help.

- Might promote their own interest at the expense of other investors and employees including
managers
- They may pay themselves special dividends or they may exploit business relationships with
the companies they control.

Take overs// hostile take overs

- The possibility of a firm being take over is seen as disciplinary device on management—
typically the threat of a takeover should serve as…
- If a firm is taken over—management would be removed—if firm has potential but it is not
being utilized then – management would typically be blamed  get rid of inefficient
management.
- Actual takeover- look in article.
- Team of investors- ruthless- market is active – they see the firms value as x. but ahs the
potential to increase “ x+y” – if assets are used to their best potential..

There has been some reservation that takeovers can be an effective corporate governance
mechanism.

Jenson- -external takeovers can be proved to be fairly effective.

Empirical evidence:

1. Take over increase the combined value of the target and acquiring firm—indicating that
profits are expected to increase post take over.
2. Take over targets are often poorly performing firms and their managers are removed once
the takeover succeeds. Prof Jenson (1986 &1988) argues that takeovers can solve the fee
cash flow problem since they usually lead to distribution of the firms profits to investors
overtime. Literature  reason- to punish inefficient management [ key reasons]

Other views:

1. Free-rider problem- small shareholders who believe that their decisions are unlikely to affect
the success of the takeover bid have an inventive not to tender to the acquiring firm. [ only
if they have enough shares to purchase] Since they may be able to obtain a portion of the
capital gain [y] there may be an incentive on small shareholders not to tender their shares.
2. Acquisitions can actually increase agency costs when biding managers overpay for
acquisitions which brings them private benefits of control.
3. The take over radars may face competition from other bidders as well as from minority
shareholders. [ singling effect—if a potential radar singles its attention-it can excite the
interest of other bidders—bidding war ensue … Management may also invite other bidders;
there is a likelihood that management would not be replaced in this case

Man inviting other bidders to participate [ white mail] the bidders encourage by management are
called white knights.

4. Acquiring firm may face competition from in combat management . therefore management
may be push it back so it is unsuccessful

Take over defense mechanisms

1. Management lobbying restrictive anti-takeover laws

2. Diluting the radars equity- sell off the firms assets, especially those which the radar is
particularly keen on acquiring—this tactic is referred to as the scorch-earth strategy
3. Man may increase the companies debt or reduce the amount of corporate cash that can be
enjoyed by a potential radar--- designed to make it unattractive
4. Management may also utilize poison pills – a financial device designed to make it impossible
for a firm to be acquired without management’s consent. Refers to special rights of the
targeted shareholders to purchase additional shares at a low price or sell shares to the firm
at a high price conditionally—e.g. in the event of a radar acquiring a certain fraction of the
target’s shares. Call or put option for target shareholder which has value only in the case of
a hostile takeover
5. Practice of green meal- targeting block stock repurchases. Man purchases at premium
6. A stand still agreement- a contract where the bidding firm agrees to limit its holdings in the
target firm. REDUCE ATTRACTIVENESS

Take overs require a liquid capital market  which gives bidders access to vast amounts of funds at
short notice. In the absence of such, take over will not be rapid or effective

Hostile takeovers are politically and extremely vulnerable mechanism since they are opposed by
powerful managerial lobby
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