Efficient market hypothesis

Kevin Drum criticizes the efficient market hypothesis (EMH) on the grounds that the management of publicly traded companies which are targets of hostile takeover offers invariably says the offer undervalues their company. Now there are certainly legitimate criticisms of the EMH but this particular criticism is silly.

Because of the agency problem the management of takeover targets will tend to resist them even if they are in the best interests of the shareholders because takeovers are often not in the best interests of the incumbent management. Of course management likes to appear to be acting in the interests of the shareholders. Hence claims that the price offered is too low as within limits this is in fact a legitimate negotiating tactic that is in the best interests of the shareholders.

As for why people might offer more than the market price if the market price is "correct", the market price generally assumes the company will be run by existing management (as replacing management is difficult). With different management the company could be worth more.