ABSTRACT
HOW DO CAPITAL MARKETS DISCIPLINE THE management of poorly performing firms? We attempt to answer this question in the context of the UK capital market by running a “horse race” between the five principal competing parties suggested in the literature. First, shareholders, and in particular large shareholders, may intervene directly and replace management when performance is poor. Second, management replacement may follow the acquisition of a large block of shares. Third, bidders may discipline the management of the acquired company. Fourth, nonexecutive directors, i.e., outside directors,
may act on behalf of shareholders and replace management when they are thought to perform poorly. Finally, financial crises may trigger interventions by shareholders when new equity is issued.
