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We propose that an active takeover market provides incentives by offering acquisition opportunities to successful managers. This allows firms to reduce performancebased compensation and can rationalize loss-making acquisitions. When choosing its acquisition policy and the quality of its board, each firm ignores the adverse effect on other firms' acquisition opportunities and takeover threat. As a result, the takeover market is not sufficiently liquid and too few takeovers occur. Furthermore,doi:10.2139/ssrn.1571866 fatcat:6zujvengubcgvplzjd3c7gejvi