Why CEOs May Want You Talking About Takeovers

PERSPECTIVES: Stock price is not always a good gauge of management's performance, says Knowledge@Wharton

Knowledge@Wharton, 21 April, 2010 | 4:01PM

From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. If you are interested in Morningstar featuring your content, please contact Online Editor Holly Cook (holly.cook@morningstar.com). Here, Knowledge@Wharton, the online business journal of The Wharton School, discusses whether a company's share price reflects corporate management and provides an incentive for managers to perform well.

Theory and common sense suggest that the marketplace imposes discipline on corporate managers. If top leadership performs poorly, the stock price will suffer. Then things could get worse--the company could become a takeover target and the executives could lose their jobs. That should be a strong incentive to perform well.

But it has been hard to find solid evidence that falling share prices really do trigger takeover activity. If the theory is false, the supposed market discipline may not exist, making it easier for managers to put their own interests ahead of the firm's.

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