Editing Takeover (section)

== Executive compensation ==
Takeovers may also benefit from a [[principal-agent problem]] associated with top executive compensation. For example, it is fairly easy for a top executive to reduce the price of their company's stock due to [[information asymmetry]].  The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in [[off-balance-sheet]] transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (i.e. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce the company's stock price.  (This is again due to information asymmetries since it is more common for top executives to do everything they can to [[window dress]] their company's earnings forecasts.) There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates.{{citation needed||date=May 2024}}

A reduced share price makes a company an easier takeover target.  When the company gets bought out (or taken private)&nbsp;– at a dramatically lower price&nbsp;– the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce the company's stock price.  This can represent tens of billions of dollars (questionably) transferred from previous [[shareholders]] to the takeover artist.  The former top executive is then rewarded with a [[golden handshake]] for presiding over the [[fire sale]] that can sometimes be in the hundreds of millions of dollars for one or two years of work. This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives. This is just one example of a principal-agent problem, otherwise regarded as [[perverse incentive]].

Similar issues occur when a publicly held asset or non-profit organization undergoes [[privatization]]. Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands.  Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis. This perception can reduce the sale price (to the profit of the purchaser) and make non-profits and governments more likely to sell.  It can also contribute to a public perception that private entities are more efficiently run, reinforcing the political will to sell off public assets.{{citation needed|date=December 2017}}