| Summary: | The dissertation proposes a "speculative leveraging" theory of hostile corporate takeovers in the merger wave of the 1980s. It hypothesizes that takeovers became widespread because intense financial market competition during the 1970s created a short time horizon and a preference for leverage and increasingly high risk assets among shareholders and lenders, while many firms maintained low indebtedness and heavy long term-oriented expenditures. When firms' debt was lower and investment was higher than preferred by stockholders, debt-financed takeovers might create premiums by promising to raise the first and lower the second. Underpinning the speculative leveraging theory is a framework in which financial practices and pricing may be unstable and destabilizing to the real sector of the economy. Because this framework differs sharply from the efficient markets view common in mainstream finance and economics, its theory of the stock market and the firm is discussed at length. Then the institutional and competitive financial market changes of the 1960s and 1970s are examined within that theoretical framework, drawing out the dynamics hypothesized to become important in the 1980s takeover wave. The speculative leveraging theory is specified in a qualitative response raider's choice model. Also so specified is the free cash flow theory of takeovers, the most influential explanation of debt-financed takeovers which lies within the efficient markets tradition. The two models are tested against a comprehensive sample of hostile takeovers over the years 1968-87, along with non-takeover control firms. Statistical results show that the free cash flow model does not explain takeover status, while the speculative leveraging model does so more strongly as hypothesized, during the 1980s. These theoretical, historical, and empirical findings suggest that the premiums accompanying 1980s takeovers should not be assumed to indicate prospective efficiency gains.
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