fail,theonlyweaponthatstockholdershaveleftistohope
thatthefirmwillbecomethetargetofahostileacquisition,
wheretheacquirerwilltakeoverthecompanyandchangethe
way it is run. For hostile acquisitions to be effective as
management-discipliningmechanism,severalpieceshaveto
fallintoplace.First,firmsthatarebadlymanagedand run
shouldbetargetedforacquisitions.Second,thesystemshould
give potential hostile acquirers a reasonable chance of
success;thebiastowardincumbencyshouldbenegligibleor
small.Third,theacquirerhastochangeboth themanagers
andthemanagementpoliciesofthetargetcompanyafterthe
acquisition.Weconsidertheempiricalevidenceoneachof
these later in this chapter.
Determinants of Management Change
There is a strong bias toward preserving incumbent
management at firms, even when there is widespread
agreementthatthemanagementis incompetentordoesnot
have the interests of stockholders at heart. Some of the
difficultiesarisefromtheinstitutionaltilttowardincumbency,
and others are put in place to make management change
difficult, if not impossible.
Institutional Constraints
The first group of constraints on challenging incumbent
management in companies that are perceived to be badly
managed and badly run is institutional. Some of these
constraintscanbetracedtodifficultiesassociatedwithraising
the capital needed to fund the challenge, some to state
restrictions on takeovers, and some to inertia.