Caballero, Lorenz Jane P.

BAFM 2-1

1. Explain how the market for corporate control is supposed to work. What factors might cause this market
to work inefficiency?

The market for corporate control, which is an essential part of the corporate environment, represents the

dynamic relationship between companies, their management, and other entities aiming to increase shareholder
value. The Market for Corporate Control is the procedure a business uses to manage and lessen agency troubles
when it is experiencing problems. This idea relates to how businesses handle the division of ownership and
control, where managers are held accountable for having less dedication than private controllers. It also has an
impact on the productivity of the organization and its ability to compete in the market.

Furthermore, it operates through two mechanisms: (1) Internal Control, which includes the internal corporate
governance structure of the company, including internal systems and procedures designed to prevent conflicts
of interest among management and to prevent deviations from the goal of optimizing the company's profit. The
board of directors is in charge of these management. The board of directors holds the highest authority within
the company, so it is their responsibility to manage the executive staff and managers and make decisions that
will increase the value for their shareholders. They must also act within the parameters of their authority, which
is, of course, allowed by law, and the scope of their operations. In addition, there are regulations pertaining to
the right of shareholders to dissent or sell their shares, which is a crucial step to support small shareholders in a
public setting. such as needing to request that the business purchase back its shares in the event that a merger
occurs.

These restrictions were far from being all-powerful since there are still additional internal controls that aren't
covered because each nation has its own set of laws that apply. Furthermore, in order to achieve the goal of
governance control, external control must be added to market corporate control if internal controls are shown to
be inadequate. There are two parties competing for possession of the rights. The first category consists of
business acquisitions and mergers, especially hostile takeovers. which external pressure can be used to resolve.
Takeovers may happen for poorly run businesses with a bad track record. The share price is about to drop due to
its badly managed operations and decreased profits. And the fact that it is about to fall simply indicates that its
value is low. That's when they're probably going to be the target of hostile takeovers and mergers that aim to
quickly take over the company by switching around the Board of Directors and Management. The purchase of
proxy rights, however, constitutes the second side. In the basic legal framework for the acquisition of proxy
rights, proxy rights are an entitlement granted to a minority of shareholders that may be publicly obtained from
others (and may form part of a minority of majority). It does grant minority shareholders the ability to express
their opinions, which puts the majority of shareholders and management under external pressure. Restrictions
on proxy voting were loosened in October 1992. Considering it an a significant obstacle keeping management
from saving money on the price of acquiring control rights.

Furthermore, a few academics have compiled a list of variables that influence the improper functioning of
market corporate control. which can be broken down into four main categories: (1) businesses incur enormous
costs during takeovers; (2) prospective buyers' knowledge is insufficient for them to be able to afford the
takeover amount; and (3) the market share price is not correlated with or indicative of the market's expectation
of the company's profit. Furthermore, the manager in charge of the person who will take over is keen to
prioritize scale maximization over value.
 2. How are perfect competition and contestability related? How are they different?

Two related economic concepts that deal with the level of competition in markets are perfect competition and
contestability. Even though they have certain things in common, they also stand out from one another with unique
qualities.

The emphasis placed on low entry barriers and the freedom of entry and exit within markets unites perfect competition
and contestability, two economic concepts. The basic idea of low entry barriers is shared by perfect competition and
contestability. Because of these similarities, businesses can enter and exit the market with ease. Another thing they have in
common is the ability for businesses to come and go without any obstacles, which fosters a vibrant marketplace. Perfect
competition depends on the ongoing threat of new entrants to discipline established firms in the market, much like
contestable markets may be threatened by entry. these concepts foster an atmosphere that encourages creativity and
competitive behavior, both of which boost productivity.

On the other hand, the two differ from its product differentiation. While product differentiation may be present in
contestable markets, perfect competition necessitates homogeneity. The focus of contestability is on ease of entry and exit
rather than necessarily on product homogeneity. Contestability does not always require complete information, but perfect
competitiveness must. The observable potential for profits which might not depend on perfect information is crucial in
contestable markets. Firms are price takers in a perfect market. Contrarily, contestable marketplaces may give businesses
considerable pricing power because the risk of new entrants keeps prices low. Long-term economic earnings are driven to
zero under perfect competition. Businesses can continue to make money in contestable marketplaces as long as there is a
genuine threat of new entrants

In conclusion, frameworks for understanding market dynamics and competitiveness are provided by contestability and
ideal competition. Perfect competition represents a specific idealized situation, whereas contestability offers a more
flexible concept that considers a range of market circumstances. Both emphasize how crucial low entry barriers and
freedom of entry and exit are to fostering competition. Understanding the distinctions between these concepts helps us
better comprehend the forces that shape various markets and the implications they have for the well-being of consumers
and economic efficiency.