TENDER OFFERS, PROXY CONTESTS, AND LARGE-SHAREHOLDER ACTIVISM

The paper analyzes tender offers and proxy contests as alternative mea ns of resolving corporate governance conflicts between dissidents and incumbent management. We show that when a dissident shareholder is suf ficiently confident about the potential benefits from changing corpora te policy, he will seek majority control by making a tender offer rath er than initialing a proxy con test. When the dissident is relatively uninformed, however, he may opt for a proxy contest, thereby utilizing the information of other shareholders to implement the better policy. Consistent with empirical evidence, the model predicts that announcem ents of tender offers will tend to be associated with larger positive stock price reactions than annoncements of proxy contests. The model i s easily extended to allow for promanagement bias in proxy voting by i nstitutional investors. Empirical observations that have been viewed a s evidence of such promanagement bias are shown to be quite consistent with the absence of such bins. Policy issues are discussed as well. A n interesting result is that even policies targeted at reducing the co sts of conducting proxy contests may have ambiguous social consequence s, given the possibility of substitution between tender offers and pro xy contests.