Learning about Managerial Entrenchment in Dynamic Hostile Takeovers

This paper shows that an acquirer's learning speed about target managerial entrenchment determines the effectiveness of hostile takeovers as disciplining devices. In a dynamic setting, an acquirer keeps collecting information about the degree of target managerial entrenchment and thereby learns it ultimately; the target manager may resist a bid to build a reputation of being strongly entrenched, which deters future bids. A slow-learning acquirer never bids in equilibrium, implying that economic factors that continuously keep target managerial entrenchment transparent are necessary in order for hostile takeovers to incentivize entrenched managers to focus on shareholders' best interests. A fast-learning acquirer bids frequently and experiences alternations between tranquility phases and bidding phases. We also derive a strong reputation result: the target manager receives her "commitment payoff," even if the acquirer is infinitely more patient