Disciplinary Takeovers and Industry Effects

This paper presents a disciplinary explanation for some seemingly paradoxi-cal stylized facts from the takeover literature. Most notable among these are: ()1 hostile takeovers are predicted better by industry-wide than by firm-()specific performance failures; and 2 gains from a successful bid for a specific firm extend to other firms in the same industry. Our explanation is based on the idea that managerial incentives based on relative performance evaluation may induce an inefficient industry-wide equilibrium in which all firms underperform with respect to a value-maximizing firm, but no firm underperforms with respect to the industry average. A takeover can serve as a means to destroy such an inefficient industry-wide incentive equilibrium. 1