What is the role of takeovers in corporate governance?

Question

What will be an ideal response?

Answer 1

Answer: When internal governance systems such as ownership, compensation, board oversight, and shareholder activism fail, the one remaining way to remove poorly performing managers is by mounting a hostile takeover. Thus the effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover. An active takeover market is part of the system through which the threat of dismissal is maintained. In fact, some research has suggested that an active takeover market complements a board's own vigilance in dismissing incompetent managers. That research found that boards are actually more likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity.