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Control of the market in the proxy contest corporate governance structure

Author: ZhangAiXia From: www.yourpaper.net Posted: 2009-04-16 18:07:53 Read:
[Abstract] proxy contest as a market for corporate control important part of its essence is the dissenters with the current management of the competition in order to achieve the control of the company. As a restraint mechanism, through the power of attorney to compete for the managers failed to achieve the objectives of the shareholders, the shareholders may be disciplined, and to improve the corporate governance structure. However, the mechanism for the realization of the proxy contest has a certain practical predicament. This article is to propose a solution to solve this dilemma.

Modern enterprise, due to information asymmetry between shareholders and managers, and both utility function is inconsistent, the shareholder must managers monitor and control the corporate governance structure, this control is divided into internal control and external control. Internal control mainly refers to the internal competition of company managers (such as managers promoted or demoted, competition for leadership positions, etc.); external control mainly refers to the competition in the proxy voting rights, the tender offer or merger, as well as directly buy shares (Manne, 1965). Whether it is a competition in the internal or external control, managers will face each other compete for the right to manage company resources, which will form the company's control over the market.
The market for corporate control transactions, including mergers and acquisitions (open market tender offer, with the bulk of the holders of Shares Agreement acquisition, tender offer) and proxy contest in two ways. Proxy contest is competition in the proxy voting rights, a voting mechanism, in accordance with this mechanism, the shareholders vote on the motion put forward by the Director, the incumbent manager or other shareholders, at the same time, in the manager and shareholders commissioned by the distribution of competitive material to actively collect not attend the general meeting of shareholders of the voting rights in order to enhance the ability to affect the voting results. The principal-agent voting rights of the real competition is competition as manager dissenting shareholders the right to the company's agents.
Since the late 1980s, the market for corporate control in the proxy contest is far more dramatic, and bring to the corporate governance structure and stakeholders had a greater impact. In the U.S. stock market, this phenomenon and the impact has been particularly evident. The (even Jianhui Fu Minghua 2002).

A proxy contest in the market for corporate control and corporate governance structure

Proxy contest is different shareholders of the Company consisting of different interest groups compete for delegate voting rights of the shareholders to obtain control of the shareholders' meeting, and thus to control the board of directors, controlling the company and change the behavior of the company's strategy. Different ways to get control of the company through mergers and acquisitions, proxy contest commissioned by collecting shareholders the right to vote the way to get control of the company. Mergers and acquisitions this control is transferred with the company, the proxy contest with lower cost, more open information disclosure. Proxy contest has unique content and features to make it and mergers and acquisitions to become the main form of the transfer of control of the company in the market for corporate control, while also making it a company external governance mechanisms, is of great significance to improve the corporate governance .
First, the dissenting shareholders the existing management of the Company proxy contest, to some extent, forcing managers to improve their own quality, to promote the low level of efficiency of the corporate governance into efficient management. Inefficient management of the Board and the management performance did not meet expectations for the performance of the company. According to statistics for 1978 - 60, 1985 the American Stock Exchange listed companies proxy contest, most of the dissenting shareholders claimed that the efficiency of day-to-day management of the company's management is very poor, improper investment policies, management of the work can not be satisfactory. A result of its work, such as the stock of low-income, the company's share price fell. Dissenting shareholders own ability to better manage the enterprise, thus to some reputation, and have some knowledge of the background and extensive management experience of the directors, supervisors candidates, trying to enter the board of supervisors and senior management agencies and oversight bodies, in order to achieve their own will, to control the resources of the company to enhance the quality of human capital in the internal governance structure of the Company. Generally speaking, the proxy contest in the market for corporate control is a mechanism to punish those who do not take the company to efficiently manage the managers.
Second, the moderate right agent to compete for personal wealth helps to improve corporate shareholders, is expected to bring to the market the better. Dodd and Warner (1983) to inspect the period from July 1962 to January 1978 96 cases of proxy contest, draw the following conclusions: (1) dissent (Challenger) shareholders in a proxy battle, winning only 25% means that only 25% of cases in this way, the Challenger gained control of the business, but more than 75% of enterprises improve the value proxy contest this process, in contention during the shareholders, the average abnormal returns of 8.2%; (2) Whether the purpose of initiating a proxy contest to obtain control of the business or simply to participate in the extraordinary gains of the board of directors, shareholders usually will occur; (3) in the proxy contest During the period, the company's share price rose less affected by the battle, of course, if the challenger won the majority of seats in the board of directors, will have the interests of the shareholders have a greater impact; (4) within 40 days prior to the occurrence of the proxy contest, stock cumulative average abnormal returns significantly to 10.5%, which indicates that around the proxy contest, the company's share price has a good performance. Bradley (1986) in the stock returns around proxy voting book information disclosure and annual general meeting of ordinary shares before and after the interpretation of the text also supports the conclusion of Dodd and Warner (1983). Later, the mainstream theory also admitted in the proxy contest, whether opponents or proponents of which side the victory of the battle, as long as it is to compete with the proxy voting rights related activities, the company's stock price will have a good performance, giving investment benefits, proxy contest contribute to the increase in shareholder wealth, better is expected to bring to the market.
Third, the moderate right agent to compete for help to alleviate the agency problems in the governance structure, enhance social welfare proxy contest Empirical studies have shown that, regardless of the proxy contest, shareholders' wealth always increases during the proxy contest the. From the welfare effects of the shareholders' point of view, the failure of the proxy contest is the loss of shareholder wealth. Overall, the threat of a proxy fight and launched for managers is a kind of invisible pressure, forcing managers to adopt policies favorable to shareholders, and reduce opportunistic behavior deviation from the shareholders' interests and to a certain extent moral hazard agent hazards. Proxy contest in company resources consumption at the same time, the competition itself alleviate the agency problem to reconcile the conflict between shareholders and managers to optimize the company's governance structure. Proxy contest as a market for corporate control transactions, it can play the role of the market for corporate control transactions. The market for corporate control through the ability to control the release of a large number of resources, so that the flow of resources to higher-value use of to increase the welfare of the whole society.

Corporate proxy contest mechanism implemented dilemma: Based on the perspective of the corporate governance structure

For good managers, they do not have spent large sums of money to acquire equity proxy contest, this seems to be a good way to replace the incumbent replacement. Strict compete for the right agent also has many problems, which limits its wide application in practice.
First, proxy contest facing the most fundamental problem is how to make shareholders believe that the success of competitors in their favor.
Private benefits of control over contender to replace the incumbent does not mean that competitors are better able to operate the company management, therefore, if the shareholders do not know the ability of competitors, but know that the average ability of potential competitors than the incumbent lower, then the shareholders of the rational decision is to choose the incumbent. But in fact, the ability of a competitor is known to the shareholders have sufficient information to vote may not judged based on the market price of its ability, in general, will still choose the incumbent. The result is that competitors even if they can do a better job because it is difficult to make shareholders believe in yourself, so it is difficult for shareholders to cast a vote for him. In the proxy contest, the uncertainty of the ability of competitors to make difficult for shareholders to vote in favor of it, this view had earlier seen Pound (1988) and Bebchuk and Kahan (1990). Proxy contest to produce a sufficient condition for effective results, if and only if the competitor's total value is greater than the total transaction costs of the proxy contest and the total value of the current managers and, when once launched on existing management competition, all rational shareholders to vote for a contender. This reason the results are often difficult to achieve due to the constraints of real-world conditions led to believe that the more excellent contender is very difficult, so in reality, the existing shareholders.
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