Three problems may discourage the use of proxy contests to challenge management and transfer corporate control. First, inefficiency in the system of proxy vote solicitation can give management a vote-getting advantage. Second, due to conflict-of-interest pressures, institutional investors may vote with management against their own fiduciary interests. Third, because some dissident proxy challenges may be ‘crank’ bids, with no prospect for increasing share values, dissidents may have to incur costs to signal the value of their bid to outside shareholders. Tests on a sample of 100 proxy contests from the period 1981–1985 confirm the existence of these problems.

This paper tests whether takeover bids and takeover resistance by target management convey information to the market about the stand-alone value of target firms. When initial bids are made, analysts' consensus forecasts of stand-alone earnings do not change significantly for any group of takeover targets. This is consistent with the synergy view of mergers and inconsistent with the undervaluation theory. Consensus forecasts fall significantly when managers resist takeover. The decline is about 10% of the level of previously forecast earnings and is approximately equal whether the target is ultimately acquired or remains independent.