likelihoodthatthemanagementofthefirmwillbechanged
and the value of making that change.
Expectations and Stock Prices
Toseehowtheexpectedvalueofcontrolshowsupinstock
prices,assumethatyouliveina worldwheremanagement
change never happens and that the market is reasonably
efficientaboutassessingthevaluesofthefirmsthatitprices.
Inthisscenario,everycompanywilltradeatitsstatus quo
value, reflecting both the strengths and weaknesses of
existing management. Now assume that you introduce the
likelihood of management change intothis market, in the
form of either hostileacquisitions or CEO changes.If the
marketremainsreasonablyefficient,thestockpriceofevery
firm should rise to reflect this likelihood:
Thedegreeto whichthis willaffect stockpriceswillvary
widelyacrossfirms,withtheexpectedvalueofcontrolbeing
greatest for badly managed firms where there is a high
likelihood of management turnover and lowest for
well-managedfirmsandforfirmswherethereislittleorno
chance of management change.
Therearemanywhowillbeskepticalaboutthecapacityof
markets to make these assessments with any degree of
accuracyandaboutwhetherinvestorsactuallytrytoestimate
theexpectedvalueofcontrol.Theevidencethatwepresent
laterinthissectionindicatesthatwhilemarketsmaynotuse