Although the influence investors exercise through voting at shareholder meetings and through representation on boards of directors does constrain the behaviour of managers, considerable scope for managerial discretion remains, and some companies are undervalued because of managerial action or inaction. These raiders are often maligned in the press but perform a vital disciplining function. In successful takeovers, the surviving company is often reorganized and streamlined, leading to its more efficient operation. We discuss the role of the stock market in accomplishing takeovers and review the empirical evidence on the contribution of takeovers to the efficiency and competitiveness of the economy. Chapter 4 explains the complicated concept of stock market efficiency.
Efficiency has several meanings that critics of the stock market often confuse.
We conclude that Canadian markets are just as efficient as U.S. markets but may be less efficient than those of Japan and Europe. Investor trust is the motivation behind much of the government regulation of the stock market, as we explore in chapter 7. In chapter 5, we offer an additional perspective on the vital importance of stock markets in modern economies. We refer here to the spectacular development of stock markets in the former centrally-planned economies of eastern Europe, and in emerging markets elsewhere. There are, of course, questions and doubts, and we address them in our discussion of the comparative effectiveness of allocating financial resources through stock markets or through the banking system, which is the stock market's major competitor in financial markets around the world.