A takeover constraint

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A takeover constraint is a limit that prevents managers from pursuing strategies that are not aligned with shareholder interests. It does not necessarily prevent a company from being taken over, but makes it more difficult for a hostile acquirer to gain control. The constraint may work by causing managers to fear losing their jobs if the company's performance falls short of expectations, leading to a decline in the company's stock price and making it vulnerable to a takeover bid. Corporate raiders may attempt to bypass the takeover constraint by launching a proxy fight to gain control of the company's board of directors or by offering a premium price to persuade shareholders to sell their shares. The constraint is more effective when the company's stock price is trading at a premium to its book value, which suggests that the market has confidence in the company's growth prospects and management team.

A Takeover Constraint