Inside Stockholders versus Outside Stockholders

There are companies like Microsoft where a large stockholder (Bill Gates) may be the on the inside as the manager of the concern. Is it possible that what is in Bill Gates' best interests as an "inside" stockholder may not be in the interests of a stockholder on the outside?

a. Yes. Their interests may deviate.

b. No. Their interests will not deviate

If yes, provide an example of an action that may benefit the inside stockholder but not the outside stockholder.

The Threat of a Takeover

The perceived excesses of many takeovers in the eighties drew attention to the damage created to employees and society some of them. In movies and books, the raiders who were involved in these takeovers were portrayed as 'barbarians', while the firms being taken over were viewed as hapless victims. While this may have been true in some cases, the reality was that in most cases, companies that were taken over deserved to be taken over. One analysis found that target firms in hostile takeovers in 1985 and 1986 were generally much less profitable than their competitors, had provided sub-par returns to their stockholders and that managers in these firms had significantly lower holdings of the equity. In short, badly managed firms were much more likely to become targets of hostile takeover bids.30

An implication of this finding is that takeovers operate as a disciplinary mechanism, keeping managers in check, by introducing a cost to bad management. Often, the very threat of a takeover is sufficient to make firms restructure their assets and become more responsive to stockholder concerns. It is not surprising, therefore, that legal attempts to regulate and restrict takeovers have had negative consequences for stock prices.

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