Factors Affecting the Market for Corporate Control: The Role of Excess Cash, Diversification, and Predation during Mergers and Acquisitions

Abstract

A a microeconomic level, the information value of a firm’s financial structure is relevant for its behaviour in takeovers and acquisitions; however, this information can be misused at great cost to the market. Consequently, takeovers and mergers could exact negative externalities on the market through short-termism, greater concentration of industry, and agency costs. This chapter examines the signalling effects of earnings retention and diversification on returns during acquisitive activities and considers the benefits and disadvantages of a more active market for corporate control within India at a macroeconomic level.