Research Article

focuses on the analysis and resolution of managerial issues based on analytical

and empirical studies.

Takeover Announcements, Open Offers, and Shareholders

Returns in Target Firms
Ajay Pandey
Introduction
Post liberalization, Indian corporate world has witnessed
several mergers and takeovers. Since corporate gover-
nance in India,-in terms of enabling legal tod economic
institutions, is considered weak,
1
it is worth its white
to study the stock price performance of target firms in
the context of change in management control. Empirical
evidence in the context of developed countries supports
the analysis that takeovers and other forms of plays,
such as mergers and proxy contests, in the market for
corporate control enhance the target firm's valuation
by either exploiting synergies between target and bidder
firm or by disciplining target firm's managers.
2
Even
though hostile takeovers are relatively uncommon
outside UK and US due to political opposition, they
are often viewed as an important, though imperfect,
mechanism in mitigating governance problem for the
investors.
3
Shleifer and Vishny (1997) argued and
challenged the effectiveness of takeovers in improving
corporate governance, particularly in weak governance
context. According to them, active takeover market can
increase the private benefit of control for the managers.
If the same basic idea is modified in the Indian (finance
without governance) context, wherein the firms are
usually controlled by owner-mangers (called promoters)
with relatively high ownership
4
stakes, it implies that
takeovers and private valuation by the bidders may be
based on their expected private benefit of control. If
this were true, the open offers would be viewed
favourably by the capital market but not because of
any positive economic effect expected from the change
in management or firms' economic prospects.
1
See relative ranking of India in a cross-country study by Demirguc-
Kunt and Maksimovic (1998).
2
See Jensen and Ruback (1983) for an early review of empirical
research in US.
3
See Shleifer and Vishny (1997) for review of research as well as
a discussion on effectiveness of takeovers in resolving corporate
governance problems between insiders and outsiders by allowing
concentration of ownership.
4
In fact, the securities' market regulator (SEBI) and the financial
institutions require that promoters need to have certain threshold
stakes in the firm.
Vol. 26, No. 3, July-September 2001
19
Vikalpa
The empirical studies in the context of
developed countries have consistently pointed
out substantial valuation gains for target firms,
particularly in case of successful takeovers.
This effect has been "found to be higher for
tender offers compared to mergers and proxy
contests, the other forms of plays in the market
for corporate control. Subsequent to enactment
of takeover enabling regulations in 1997 in
India, takeovers and substantial acquisition of
shares necessitate making open offer to the
investors. Based on the empirical investigation
of 14 large (above Rs 10 crore) takeover related
open offers using event study methodology, we
document significant announcement effect (
10%) associated with the takeovers in Indian
capital market. We also find that the target firm
valuations increase in the runup to
announcement. However, unlike developed
countries, substantial part of these gains are
wiped out subsequently indicating that
valuation gains associated with takeovers in
large part reflect private value of control,
expected to be high in the Indian context The
fact that only one large open offer (out of 16
in all) was associated with an attempted
unsuccessful hostile takeover bid suggests that
given relatively large insiders' shareholdings,
takeovers as governance mechanisms are not
likely to be effective and private value of
control may be the driver in the market for
t t l
Ajay Pandey is a member of the faculty in the
Finance Area of the Indian Institute of
Management, Ahmedabad. e-mail:
Apandey@nmahd.ernet.in
The market, by reacting favourably, would be
simply responding to a transitory opportunity to extract
some part of the value associated with the acquirer's
expected private value of control through arbitrage. This
paper presents a study of relatively large target firms'
price performance surrounding open offers in the
context of change in management.
The primary motivation for the study was to test
whether takeovers are seen by the capital market as
creating value to the firm by improving performance
as a consequence of change in management or as mere
replacement of existing management without any
expectation of concomitant improved managerial and
firm performance. The latter argument, as outlined
earlier, implies that takeovers are driven by private
benefit of control and even if the market values such
target firm at a higher level during the takeover process,
if is merely due to the fact that some part of the private
value of control can be shared due to mandatory open
offer at a price, which is a reflection of existing and
potential private benefit of control.
5
This line of analysis,
therefore, implies that the higher valuation of target
firms will not persist once the process of change in
control is over.
Takeover Regulations in India
Till 1994, a suitable regulatory framework to facilitate
takeovers in India through tender or open offer did
not exist. Besides lack of enabling framework, relatively
large inside holdings (direct as well indirect) and passive
role played by the financial institutional investors
(thereby, helping incumbents) were some of the other
reasons for lack of takeover activity in the Indian capital
markets. Except for clause 40 of listing agreement, the
minority outside shareholders (and hence market) did
not come upto play until were not protected in the
context of takeover or substantial acquisition of shares.
Clause 40 of the listing agreement stipulated that
anyone acquiring more than 10 per cent (25% till 1990)
voting rights/shares will have to make an open offer to
other shareholders for a minimum of additional 20 per
cent shares. This stipulation was very weak as it was
based on shareholding and not on control. In the
Indian context, it was and is possible to control a firm
indirectly through cross-holdings. In 1994, the
Securities and Exchange Board of Indra (SEBI), the
capital market
5
If tfie shares are acquired from the market at low prices, they
reflect the existing private benefit of control as imputed by the market.
In such case, the incumbent is also likely to contest the bid by giving
a counter offer. If, however, the shares are acquired from the
incumbents through bilateral negotiations, they are based on prices
reflecting the value of control to both incumbent and bidder.
regulator, came out with regulations oh takeovers and
substantial acquisition for the first time. The new
regulation warranted that anyone acquiring more than
10 per cent of voting rights in a company needed to
make an open offer to buy-out a minimum of additional
20 per cent shares or voting rights, which reflected the
prevalent clause 40 of the listing agreement for listed
companies. By formalizing the same, the SEBI regu-
lations widened its applicability and improved its
enforceability. As the regulations of 1994 gave rise to
severe problems of interpretation, SEBI appointed a
committee headed by Justice PN Bhagwati in 1995. The
report of this committee was submitted in January 1997
and SEBI reformulated its regulations and notified it
by February 1997. Later, they were modified in 1998
to change the threshold level of acquisition triggering
open offer from 10 per cent to 15 per cent and creeping
consolidation limit from 2 per cent per year to 5 per
cent per year. The takeover regulations by SEBI in 1997,
thus, mark the beginning of an era in which takeovers
and substantial acquisition of shares in firms are covered
by regulations, which force the contestants in market
for corporate control to share some part of the private
value of control with outsiders. The post-1997 period
also facilitates research in this area, as the information
related to the open offers is available in public domain.
Takeovers and Market for Corporate
Control
The interest in the influence of market for corporate
control on the firms started with the seminal article of
Manne (1965), in which he viewed takeovers and market
for corporate control as mechanisms to check mana-
gerial discretion conflicting with the shareholders'
objective of wealth maximization. With the explicit
characterization of firm as nexus of contracts and
recognition of "principal-agent" problem embedded in
the context of separation between ownership and
control [term used later by Shleifer and Vishny (1997) is
separation between Finance and Management], the
agency- theoretic view of firm developed by Jensen and
Meckh'ng (1976) linked the literature on market for
corporate control with that of corporate finance. The
agency costs due to conflict of interest between share-
holders and managers are not borne completely by '
shareholders themselves, but also by managers and
insiders through lower salaries (Fama, 1980) and lower
valuation of the firm (Jensen and Meckling, 1976) to
the extent the conflict of interest between managers or
insiders manifests itself or is anticipated by the outsiders.
As argued by Jensen and Ruback (1983), the efficacy
of internal control systems to align the managers' interest
with that of shareholders is contingent on the costs

Vol. 26, No. 3, July-September 2001 20
Vikalpa
associated with designing a system which measure
managerial deviations from the shareholders' wealth
maximization and are not expected to be trivial.
6
The
presence and extent of agency costs itself has been
documented through empirical research across countries
and has been comprehensively reviewed by Shleifer and
Vishny (1997) in their seminal paper on corporate
governance. The empirical evidence in the form of event
studies has been consistent with the presence of
significant agency costs. The event studies in US find
negative returns associated with investment announce-
ments by oil firms (McConell and Muscarella, 1986)
consistent with Jensen's (1986) argument that managers
prefer to reinvest cash over returning it to investors.
Other event studies have found negative returns for
bidders on acquisition announcement (Lewellen et al,
1985; Roll, 1986), negative returns on announcement
of anti-takeover provisions (DeAngelo and Rice, 1983;
Jarrell and Poulsen, 1988), positive returns on sudden
deaths of entrenched and powerful managers (Johnson
et a/., 1985). Similarly, empirical studies have also found
evidence-of negative effect of diversification on share-
holders' wealth (Bhagat, Shleifer and Vishny, 1990;
Lang and Stulz, 1994; Comment and Jarrell, 1995), poor
history of diversification by US firms (Kaplan and
Weisbach, 1992), etc. These evidences are consistent
with the presence of agency costs due to private benefits
of control and are further corroborated with evidence
of marginally higher prices of shares with superior
voting 'right (Lease, McConell and Mikkelson,
1
I
983,19&4; DeAngelo and DeAngelo, 1985; and
Zingales, 1995) and the rise of this premium in case
bf contest for control (Zingales, 1995).
According to the agency-theoretic view of firm, the
market for corporate control manifests itself through
competition among "alternative management teams for
rights tp manage corporate resources" (Jensen and
Ruback, 1983) and is seen as external control mecha-
nism limiting managers' arena to take decisions, which
are pace inconsistent with that of shareholders' interest.
In the market for corporate control, the competing
managerial teams use different instruments, such as
tender offers, mergers, and proxy contests, to acquire the
rights to manage corporate resources. The market for
corporate control allows aggregation of ownership and
along with it intemalization of potential costs and
benefits to the bidding managerial team. Otherwise, the
externality of "free-riding by other widely dispersed
investors" is recognized as a major deterrent to
competition in market for corporate control. While the
free-rider problem does get reduced in the market for
corporate control to some
'See footnote 27 of Jensen and Ruback (1983).


extent, free-riding by the existing shareholders by
holding out makes takeover costly for the bidder
(Grossman and Hart, 1980). Given the complex nature
of problems like information asymmetry, design of
appropriate internal control and compensation system,
and monitoring costs in the face of incomplete contract
the investors have with managers or insiders, market
for corporate control is seen as are important though
imperfect control mechanism to limit managerial dis-
cretion (Jensen, 1988; Scharfstein, 1988). It can solve
free cash flow problem by distributing them to share-
holders (Jensen, 1986,1988) and may be the only
effective governance mechanism if internal controls fail
(Jensen, 1993).
The empirical evidence in the form of event studies
unequivocally points out that the target firms' valuations
increase substantially in takeovers. Some of the early
event studies by Mandelker (1974), Ellert (1976), and
Langetieg (1978) on takeovers used the effective date
of approval as the event date. The first study on
takeovers recognizing the announcement date as event
date is believed to be by Dodd and Ruback (1977) who
find excess return of approximately 20.5 per cent and
19 per cent for successful and unsuccessful tender offers
respectively, hi the announcement month. Their sample
consisted of offers between 1958-1978 period. Similar
event studies by Kummer and Hoffmeister (1978),
Bradley (1980)Jarrell and Bradley (1980), and Bradley,
Desai and Kim (1982) document 16-34 per cent excess
returns around announcement date or month using
different sample periods. Jensen and Ruback (1983:),
while reviewing these studies, conclude that shareholder
returns for targets in both successful and unsuccessful
takeover bids are significant and the estimates could
be downward biased in some studies as half of the price
adjustment takes place prior to public announcement
(Keown and Pinkerton, 1981). Later, Jarrell, Brickley
and Nelter (1988) analysing 663 successful tender offers
between 1962 and December 1985 report average
excess returns of 19 per cent during 60s, 35 per cent
in 70s, arid 30 per cent between 1980-85. They point
out that these returns understate total gains to target
firms' shareholders as the stock prices go up for these
companies much prior to announcement of tender
offers. Bradley, Desai and Kim (1988) similarly report
significant gains for target firms' shareholders across
different time-periods based on their analysis of stock
returns associated with 236 successful tender offers
between July 1963-December 1984. The empirical
evidence across studies overwhelmingly points out to
significant gains for target firms' shareholders though
the evidence for gains to the bidder firms' shareholders
is mixed, ranging from negative (Roll, 1986) to low

21 Vikalpa
Vol 26, No. 3, July-September 2001
positive for successful takeovers
7
(Jensen and Ruback,
1988). Evidence also exists for the disciplinary effect
of takeover, as the incumbents are more likely to be
removed after a takeover (Martin and McConnell, 1991)
and Ihe taken over firms are more likely to be poorly
performing firms (Palepu, 1986).
Despite widely accepted view of takeovers as an
important, though imperfect, governance mechanism,
Shleifer and Visfany (1997) questioned the effectiveness
of takeovers as governance mechanism. In addition to
free-rider problem making takeovers costly for bidders
(Grossman and Hart, 1980), they argue that takeovers
require liquid capital markets to finance, which may
not always exist or may not be there in all countries.
They also point out mat takeovers rather than mitigating
governance problems could increase them by helping
insiders and managers to expand their empires, even
by overpaying for the acquisitions. The fact that hostile
takeovers invite political opposition and are prevalent
only in the US and UK were also brought out by them
10 question their effectiveness. Besides these arguments,
effectiveness of market for corporate control is also
contingent on the concentration of ownership, as the
effectiveness of hostile takeovers is limited if there is
a single large block of voting rights (Stulz, 1988). Stulz
(1988) shows that though the expected premium rises
for any takeover bid with the increase in insiders'
holdings, its probability reduces. It is clear that hostile
takeover bid is impossible in the limiting case of more
than SO per cent inside shareholding. Weston (1979) had
already pointed out that the hostile takeovers of firms
having more than 30 per cent single block of shares
held by incumbents are rare.
In a context like India, where relatively large
inside holdings are common in firms and where the
other elements of corporate governance are allegedly
weak, takeovers are expected through friendly change
of control except lor a few firms, which may have
relatively less inside holdings. The ownership pattern
found in India is Kkely to reduce effectiveness of
takeovers as governance mechanisms and, therefore,
the capital markets are also expected to react differ-
en<fy. In case of a friendly takeover, the bidder may
have to pay a premium over the market price to the
incumbent enjoying private benefit of control. The
outcome may be based on bilateral negotiations carried
oat (with information asymmetry problems) and may
be determined by both the parties' private values
placed on, private benefit of control as much as on die
common value (market price). The mandatory open
-
' See Table I in Jeaien and Ruback (1983). It is based on a review
of empirical ftudiei till then.
Vol. No. 3, July-September 2001
22
offers associated with takeovers as well as wealth effect
on the bidder make the bid price contingent on the
latter. In this argument, the gains to the target firms'
shareholders are expected to be limited to the offer
period if the change in control is only to extract private
benefit of control. The gains observed would be mainly
due to the play of "value of control" during the
takeover or change of control process. Even in case
of hostile takeovers, the weaknesses in other elements
of governance mechanisms, the "value of control" and
not increasing economic value of the firm may be the
predominant motive and the target firms' shareholders
may only gain because the bidder is forced to share
this value with a sub-section of shareholders. The
capital market reaction to open offers associated with
change in control in India offers an opportunity to test
these implications empirically and this has been the
primary motivation behind this study.
Change in Control, Large Open
Offers, and Stock Returns in Indian
Capital Market
Data
While takeovers or change in control have been
infrequently taking place in India, it is only after SEBI
regulations of 1997 that the conditions for making an
open offer were clearly specified. This made it mandatory
on the part of acquirer/ bidder to make an open offer
at least to the extent of 20 per cent shareholding, except
for exemptions given by SEBI under certain conditions.
In case of hostile takeovers or substantive change of
control, the open offers are necessary. Between April
1997 and April 2001, 268 open offers have been made.
These offers, characterized under three heads change
of control, substantial acquisition, and consolidation of
holdings are given in Table 1. As is evident from
the table, the highest proportion of these offers is
associated with change in control. Despite a large number
of open offers, only 16 of these open offers entailed
an outlay of Rs 10 crore (slightly less than US $2.5 million).
The remaining ones are related to firms which are small
and their stocks are fairly illiquid. Any meaningful study
of the impact of change in control of firm on gains
for shareholders or shareholders' returns requires that
the stock is frequently traded and be liquid during the
period of study, a condition unlikely to be met during
the period under study as stocks of only relatively medium
and large firms have been liquid enough. The study
was restricted only for open offers of above Rs 10 crore.
Table 2 gives details of the target firm, offer price, and
offer period of these 16 firms. The information was
collected from the official web-site of SEBI.
Vikalpa
Table 1: Open Offers in India
Period
Change in Control
Substantial Acquisition Consolidation of Holdings
Total
April 1997-March 1998 20 13 10 43
April 1998-March 1999
April 1999-March 2000
29
43
12
23
25 9 66
75
April 2000-March 2001 70 2 5 77
April 2001 4 1 2 7
Total 166 51 51 268
Source: Securities and Exchange Board of India, data on takeovers at web-site, www.sebi.com.
Table 2: Large Open Offers Associated with Change in Control
(Sample of the Study)
No Target Firm
Bidder Offer Price (Rs) Offer Period
i
Gujarat Gas British Gas 270 14* Aug. 97- 13* Sept. 97
2. Wimco Swedish Match 35 9* Feb.98- 11* Mar.98
3. Merind Wockhardt 260 29
th
Apr,98- 28* May.98
4. BFL Software Barings India 135 9
th
May. 98- 8* June 98
S.
Modi Xerox Xerox 150 17* June 99- 16* July 99
6. Autolec Industries Sundaram Fast 82.50 23
rd
July 99- 21* Aug. 99
* Albright and Wilson ISPG 240 26* Oct. 99- 24
th
Nov. 99
8. DLF Cement Guj. Ambuja 13.85 19* Jan. 00- 17
th
Feb. 00
9. Coates of India Sun Chemical 165 21* Feb. 00- 21" Mar. 00
10. Indian Aluminium Hindalco 190 26* May 00- 24
th
June 00
11, Superior Air Products Inox Air 81.20 5* June 00- 4
th
July 00
12. BSES Reliance 234.60 17
th
June 00- 16* July 00
B. Steelage Industries Gummenbo 272 23
rd
Oct. 00- 21* Nov. 00
I4>. GESCO Corp. Renaissance
Mahindra/Sheths
27/
44
24* Nov. 00- 24* Jan. 01
26* Dec. 00- 24* Jan. 01
15. Com Products/ Hindustan Lever 173 27* Nov.OO- 26* Dec. 00
International Best Food
16. Rhone Poulenc Nicholas Piramal 875 6* Feb. 01- 7* Mar. 01
Source: Securities and Exchange Board of India, data on takeovers at web-site, www.sebi.com.
Methodology
We follow event study methodology to assess the impact
of open offer announcements on target firms' stock
returns, as has been the case with the empirical works
Cited earlier. Using risk and market adjusted variant of
event study methodology, we first estimate parameters
of the following model (a. and (3., for each stock) by
regressing individual daily stock returns on the market
index over the estimation period:
R
i
=
i
+
i
R
m
..... (1)
where,
R
i
daily returns on i* stock, calculated as natural
log of price relative, and
R
m
daily returns on market index
The estimation period used was -51 days to -150 days
(0 day being the open offer announcement day). The
adjusted daily share price of the target firms was
obtained from PROWESS (corporate database of
Centre for Monitoring Indian Economy). The market
index used for the market model is BSE Sensex (30
share value-weighted index of the stock _ exchange,
Mumbai). The test-statistics for significance of excess
daily return is given by:
E
t
/ a (E
t
)
where, E
t
is average excess return on day t across
the stocks and is given by:
E
t
= 1/N*( E
i , t
)

Vol. 26, No. 3, July-September 2001 23 Vikalpa


Table 4A: Open Offers and Announcement
Effect: Market-adjusted Excess Re-
turns (Non-trading Days as Missing
Data, N-14)
Period
Excess Returns (%) t-statistus
0 to +5 Days -1.70697 -0.573774
Day 0 4.69415 3.528237
-1 to Day 0 7.85527 4.174912
-2 to Day 0 10.54271 4.575019
-5 to Day 0 12.62987 4.245364
-10 to Day 0 16.8189 3.997585
-30 to Day 0 30.3287 4.161929
Table 4B: Open Offers
d
Announcemen
Effect: Market-adjusted Excess Re-
turns (Index Returns Adjusted for
Corresponding Returns, N-14)
Period
Excess Returns (%) t-statistics
0 to +5 days -2.04210 -0.663787
Day 0 4.47180 3.250267
-1 to Day 0 7.43071 3.819019
-2 to Day 0 10.1182 4.245972
-5 to Day 0 12.1668 3.954845
-10 to Day 0 16.3905 3.767292
-30 to Day 0 28.3813 3.766246
days. Looking at the raw data, it was apparent that
particularly after open offer period, the trading in the
stocks becomes infrequent, as there were large number
of non-trading days in the data set. Ignoring the returns
between successive trading days results in information
loss. This is apparent from the behaviour of CAR in
the two charts. While in Chart 2A, the CAR indicates
that the target firms' stock returns stabilize after retracing
some part of the gains earlier, Chart 2B based on returns
across non-trading days indicates that most of the gains
are wiped out after the offer period is over. This
evidence is contrary to the stock price behaviour
elsewhere, where most of the gains are found to be
persisting. The result is also consistent with the argument
that in absence of strong elements of other corporate
governance mechanisms, takeover by itself cannot be
effective and may be driven by the private value of
benefits of control. The gains on such target firms' stock
are transitory as the bidders in the corporate control
market are forced to share some value with the other
shareholders through open offers.
Vol. 26, No. 3, July-September 2001
Cumulative Average Excess Returns (CAR) around
the Offer Closing Day
The CAR plots in Charts 1, 2A, and 2B are around
announcement day, with 0 day being announcement
day. To analyse the returns behaviour around offer
closing day, after which the transitory opportunity to
sell at offer price to the acquirer ends, we calculated
CAR between -10 to +60 trading days. The period
chosen is immediately after the period in which market
prices would be influenced by the offer price for
acquisition. Chart 3 plots the CAR with 0 day being
the offer closing day. As can be seen, the returns of
these stocks continue to drift downwards, with maxi-
mum drop immediately prior to the close of offer period.
Discussion on the Literature
The results discussed so far regarding post-announce-
ment stock returns for target firms undergoing change
of control in India are very different from the empirical
evidence in the context of developed countries, as
discussed earlier. They are also consistent with the
critique of market for corporate control as an effective
corporate governance mechanism by itself, unless
supported by legal and economic institutions protecting
outside investors. Our results are also different from
that of Mohanty (2000), who studied 24 acquisitions
in India during the period 1996 to 1997 and found
positive excess returns up to 60 days for target firms.
We think that -the difference in the results is mainly
due to differences in regulatory regimes. SEBI takeover
regulations came into force during 1997.This means that
the sample of study by Mohanty includes firms which
were taken over earlier. If the open offers are not
necessary or are made at low-enough prices (after
negotiating a large block purchase), then the returns
behaviour would not be as observed. The amount by
which the acquirers are forced to share their expected
private benefits makes the difference to both the
probability of acquisition as well as market valuation.
The study by Mohanty has small and medium sized
target firms as well, which we have not studied
deliberately, as the premises of both capital market
efficiency as well as economic rationality on the part
of bidders are more likely to be violated for smaller
transactions in market for corporate control.
One striking observation in our sample was that
only one of the 16 large open offers made during the
period was associated with contested control, i.e.,
GESCO Corporation. Even that bid failed as insiders
and a white knight upped the offer and simultaneously
bought over the bidder. All others were cases in which
the control was transferred through bilateral negotiation
between incumbents and bidders. It is hardly surprising
26 Vikalpa

Chart 3: Cumulative Average Excess Returns Around Offer Closing Day-Market-adjusted Returns

o
-0.25
J
-
Trading Days with Respect to "Offer Closing Day"

that takeovers may not be disciplinary mechanisms in
such a context. The market seems to think similarly.
It is possible to conjecture that market may view
open offers associated with substantial acquisition dif-
ferently as opposed to those associated with change in
control, because it increases the possibility of contest
later. The large open offers associated with substantial
acquisitions are even fewer, but may shed some more
light on the characteristics of market for corporate
control in India.
Summary and Conclusions
The corporate finance literature analysing takeovers
argues that takeovers in particular and market for
corporate control in general benefit the shareholders
and society (Jensen, 1988). Empirical evidence has been
consistent with the analysis. The arguments in the
economic analysis of market for corporate control have
been based on its disciplinary effect and optimal
resource utilization through corporate restructuring
facilitated by market for corporate control. On the other
hand, some authors have pointed out weakness of
market for corporate control as disciplinary mechanism.
The free-rider problem faced by a potential bidder and
presence of a single large block makes acquisition a
costly proposition, reducing the effectiveness of market
for corporate control. Similarly, market for corporate
control may aggravate the governance problems, if
private benefit of control rather than the potential
economic value of the firm is the driver of market for
corporate control. This is a more likely scenario in weak
governance context. It is, therefore, interesting to study
post-announcement valuation effect in a context like
India, where the corporate governance is considered
weak.
Analysing daily stock returns of 14 target firms in
which large open offers were made associated with
change in control in India, we find that the announce-
ment effect of the open offer (associated with change
in control) is similar to studies from other countries.
However, we find that post announcement, these gains
are eroded substantially unlike the reported evidence
from other countries. The results of our study are
consistent with the argument that private value placed
at control is quite high in such transaction and capital
market does not place as high value on the firm. The
findings also have implications for the Indian regulator
(SEBI). Currently, the minimum size of open offers has
been kept at 20 per cent of the aggregate shareholdings.
The incumbents (industrial houses) have been demand-
ing that the bidders should be forced to buy-out all
the shareholders. From the governance perspective,
either the control should vest with those who have very
high stakes (direct, as otherwise control can be leveraged
though partly owned and fully controlled entities) or
very low stake. In case of former, the interests of insiders
and outsiders are aligned naturally and in case of latter,
the market for corporate control can be expected to

Vol. 26, No. 3, July-September 2001 28 Vikalpa
-005
-0 1
-015
be effective. Otherwise, market for corporate control
cannot be expected to be very effective, similar to the
result obtained by Sfculz, as discussed elsewhere in the
paper. This reasoning supports the current relatively low
open offer size if an overall cap is also prescribed. The
other alternative of buying out all other shareholders,
though sound from governance perspective, may make
acquisition bid too costly to be an effective deterrent
for incumbents.
References
Bhagat, S; Shleifer, A and Vishny, R (1990). "Hostile
Takeovers in the 1980s: The Return to Corporate Spe-
cialization," Brookings Papers on Economic Activity:
Microeconomics, Special Issue, pp 1-72.
Bradle^, M (1980). "Interfirm Tender Offers and the Market
for Corporate Control, "Journal of Business, Vol 53, pp 345-
376.
Bradley, M; Desai, A and Kim, E H (1982). "Specialized
Resources and Competition in the Market for Corporate
Control," Working Paper (University of Michigan, Ann
Arbor,. MI).
Bradley, M; Desai, A and Kim, E H (1988). "Synergistic Gains
from Corporate Acquisitions and their Division Between
Stockholders of Target and Acquiring Firms," Journal of
Financial Economics, Vol 21, pp 3-40.
Comment, R and Jarrell, G (1995). "Corporate Focus and
Stock Returns," Journal of Financial Economics, Vol 37, pp
67-87.
DeAngelo, H and DeAngelo, L (1985). "Managerial Own-
ership of Voting Rights,"/ourna/ of Financial Economics, Vol
14, pp 33-69.
DeAngelo, H and Rice, E (1983). "Anti-takeover Amendments
and Stockholder Wealth," Journal of Financial Economics,
Vol 11, pp 329-360.
Deinirguc-Kunt, A and Maksimovic, V (1998). "Law, Finance
and Firm Growth," Journal of Finance, Vol 53, pp 2107-
2138.
Dodd, P and Ruback, R (1977). "Tender Offers and Stock-
holder Returns: An Empirical Analysis," Journal of Financial
Economics, Vol 5, pp 351-374.
Ellert, J C (1976). "Mergers, Antitrust Law Enforcement and
Stockholder Returns," Journal of Finance, Vol 31, pp 715-
732.
Fama, E (1980). "Agency Problems and the Theory of the
Firm," Journal of Political Economy, Vol 88, pp 288-307.
Grossman, S and Hart, O (1980). "Takeover Bids, the Free-
rider Problem, and the Theory of the Corporation," Bell
Journal of Economics, Vol 11, pp 42-64.
Jarrell, G and Bradley, M (1980). "The Economic Effects of
Federal and State Regulations of Cash Tender Offers,"
Journal of Law and Economics, Vol 23, pp 371-407.
Jarrell, G and Poulsen, A (1988). "Shark Repellents and Stock
Prices: The Effects of Anti-takeover Amendments Since
1980," Journal of Financial Economics, Vol 19, pp 127-168.
Jarrell, G; Brickley, J A and Netter, J M (1988), "The Market
for Corporate Control: The Empirical Evidence Since
1980," Journal of Economic Perspectives, Vol 2, pp 4^68.
Jensen, M (1986). "Agency Costs of Free Cash Flow, Corporate
Finance, and Takeovers," American Economic Review, Vol
76, pp 323-329.
Jensen, M (1988). "Takeovers: Their Causes and Conse-
quences," Journal of Economic Perspectives, Vol 2, pp 21-48.
Jensen, M (1993). "The Modern Industrial Revolution, Exit,
and the Failure of Internal Control Systems," Journal of
Finance, Vol 48, pp 831-880.
Jensen, M and Meckling, W (1976). "Theory of the Firm;
Managerial Behavior, Agency Costs and Capital Struc
ture," Journal of Financial Economics, Vol 3, pp 305-360.
Jensen, M and Ruback, R (1983). "The Market for Corporate
Control: The Scientific Evidence," Journal of Financial
Economics, Vol 11, pp 5-50.
Johnson, W B; Magee, R; Nagarajan, N and Newman, H
(1985). "An Analysis of the Stock Price Reaction to Sudden
Executive Deaths: Implications for the Management
Labour Market," Journal of Accounting & Economics, Vol 7,
pp 151-174.
Kaplan, S and Weisbach, M (1992). "The Success of Acqui-
sitions: Evidence from Divestitures," Journal of Finance, Vol
47, pp 107-138.
Keown, A J and Pinkerton, J M (1981). "Merger Announce-
ments and Insider Trading Activity: An Empirical Inves-
tigation," Journal of Finance, Vol 36, pp 855-869.
Kummer, D and Hoffmeister, R (1978). "Valuation Conse-
quences of Cash Tender Offers," Journal of Finance, Vol
33, pp 505-516.
Lang, L and Stulz, R (1994). "Tobin'Q, Corporate Diversi-
fication and Firm Performance,"/oarn/ of Political Economy,
Vol 102, pp 1248-1280.
Langetieg, T (1978). "An Application of a Three-factor
Performance Index to Measure Stockholders' Gains from
Mergers," Journal of Financial Economics, Vol 6, pp 365-
384.
Lease, R; McConnell, J and Mikkelson, W (1983). "The
Market Value of Control in Publicly Traded Corporations,"
Journal of Financial Economics, Vol 11, pp 439-471.
Lease, R; McConnell, J and Mikkelson, W (1984). "The
Market Value of Differential Voting Rights in Closely Held
Corporations," Journal of Business, Vol 57, pp 443-467.
Lewellen, W; Loderer, C and Rosenfield, A (1985). "Merger
Decisions and Executive Stock Ownership in Acquiring
Firms," Journal of Accounting & Economics, Vol 7, pp 209-
231.

Vol. No. 3, July-September 2001 29
Vtkalpa
Mandelker, G (1974). "Risk and Return: The Case of Merging
Firms " Journal of Financial Economics, Vol 1, pp 303-335.
Marine, Hpnry (1965). "Mergers and the Market for Corporate
Control," Journal of Political Economy, Vol 75, pp 110-126.
Martin, K and McConnell, J (1991). "Corporate Performance,
Corporate Takeovers, and Management Turnover," Journal
of Ffname, Vol 46, pp 671-688.
Mcconnell.J and Muscarella, C (1986). "Corporate Capital
Expenditure Decisions and the Market Value of the Firm,"
Journal of Financial Economics, Vol 14, pp 399-422.
Mohanty, P (2000). "Unrelated Corporate Diversification and
Shareholders' Value," in Shashikant, U and Arumugam, S
(eds.), Indian Capital Markets: Trends and Dimensions, New
Delhi: Tata McGraw-Hill.
Palepu, K (1986). "Predicting Takeover Targets: A Methodo-
logical and Empirical Analysis," Journal of Accounting &
Economics, Vol 8, pp 3-35.
Roll, R (1986). "The Hubris Hypothesis of Corporate Take-
overs," Journal of Business, Vol 59, jpp 197-216.
Scharfstein, D (1988). "The Disciplinary Role of Takeovers,"
Review of Economic Studies, \bl 55, pp 185-199.
Scholes, M and Williams, J (1977). "Estimating Betas from
Nonsynchronous Data," Journal of Financial Ecmomia, %1
5, pp 309-327.
Shleifer, A and Vishny, R W (1997). "A Survey of Corporate
Governance," Journal of Finance, Vol 52, pp 737-783.
Stulz, R M (1988). "Managerial Control of Voting Rights:
financing Policies and the Market for Corporate Control,"
Journal of Financial Economics, Vol 20, pp 25-54.
Weston, J F (1979). "The Tender Takeover," Mergers & Acqui-
sitions, pp 74-82.
Zingales, L (1995). "What Determines the Value of Corporate
Votes?" Quarterly Journal of Economics, Vol 110, pp 1075-
1110.

Vol. 26, No. 3, July-September 2001 30 Vikalpa