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To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem

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Author Info
Holmstrom, Bengt
Nalebuff, Barry

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Abstract

This paper reexamines Grossman and Hart's (1980) insight into how the free-rider problem excludes an external raider from capturing the increase in value it brings to a firm. The inability of the raider to capture any of the surplus depends critically on the assumption of equal and indivisible shareholdings--the one-share-per-shareholder model. In contrast, we show that once shareholdings are large and potentially unequal, a raider may capture a significant part of the increase in value. Specifically, the free-rider problem does not prevent the takeover process when shareholdings are divisible. Copyright 1992 by MIT Press.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 1 (1992)
Issue (Month): 1 (Spring)
Pages: 37-62
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Handle: RePEc:bla:jemstr:v:1:y:1992:i:1:p:37-62

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  1. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 2005. "Minority Blocks and Takeover Premia," CEPR Discussion Papers 5240, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Bilge Yilmaz, . "A Theory of Takeover Bidding," Rodney L. White Center for Financial Research Working Papers 03-00, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
  3. Walter Novaes, 1999. "Managerial turnover and leverage under a takeover threat," Textos para discussão 402, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  4. Matthias Blonski & Ulf von Lilienfeld-Toal, 2008. "Excess Returns and the Distinguished Player Paradox," cege – Center for European, Governance and Economic Development Research Discussion Papers 78, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany)., revised 27 Oct 2008. [Downloadable!]
  5. Jeremy Bulow & Paul Klemperer, 1994. "Auctions vs. Negotiations," NBER Working Papers 4608, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Ilya Segal, 1998. "Contracting with Externalities," Public Economics 9802002, EconWPA. [Downloadable!]
  7. Mueller, Holger M & Panunzi, Fausto, 2003. "Tender Offers and Leverage," CEPR Discussion Papers 3964, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Lucian Bebchuk & Oliver Hart, 2001. "Takeover bids vs. Proxy Fights in Contests for Corporate Control," NBER Working Papers 8633, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Bilge Yilmaz, . "A Theory of Takeover Bidding," Rodney L. White Center for Financial Research Working Papers 3-00, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
  10. Bebchuk, Lucian Arye & Hart, Oliver, 2001. "Takeover Bids versus Proxy Fights in Contests for Corporate Control," CEPR Discussion Papers 3073, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Ann B. Gillette & Thomas H. Noe, 2000. "If at first you don't succeed: an experimental investigation of the impact of repetition options on corporate takeovers," Working Paper 2000-9, Federal Reserve Bank of Atlanta. [Downloadable!]
  12. Francesca Cornelli & David D. Li, . "Risk Arbitrage in Takeovers," Rodney L. White Center for Financial Research Working Papers 17-98, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
  13. Lucian Arye Bebchuk & Luigi Zingales, 1996. "Corporate Ownership Structures: Private versus Social Optimality," NBER Working Papers 5584, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. David Gill & Daniel Sgroi, 2004. "Sequential Decision-Making and Asymmetric Equilibria: An Application to Takeovers," The B.E. Journal of Theoretical Economics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
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