Dilution Of Voting Right And The Market For Corporate Control

In a takeover raid, it has been often observed that inefficient takeovers do take place. Corporate charters provide various takeover defenses which make change in control in the firm virtually impossible. Empirically it has been observed that takeover defenses have a negative influence on the firm value. However as these measures also deter inefficient raiders from taking over the firm, it has been often argued in favor of these methods. In this paper I have considered a new method of takeover. Raider offers to buy 50 % of the voting stock and commits to dilute her voting stake once she gets control. Also following change will be made in the corporate charter. In any future takeover raid if both incumbent and outsider shareholders submit their shares, outsiders shares will be picked first by the raider. It will be shown that this mechanism is ex ante efficient, because it removes the need for costly takeover defense methods and it is ex post efficient also, as it enables only the good raiders to takeover the firm