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Initial Shareholdings and Overbidding in Takeover Contests

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 Burkart, Mike

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Abstract

Within the context of takeovers, this paper shows that in private-value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e., to bid more than his valuation. This strategy, however, can lead to an inefficient outcome and the winning bidder making a net loss. Further, the overbidding result implies that the presence of a large shareholder increases the bid premium in single-bidder takeovers at the expense of reducing the probability of the takeover actually occurring. Copyright 1995 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 50 (1995)
Issue (Month): 5 (December)
Pages: 1491-1515
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Handle: RePEc:bla:jfinan:v:50:y:1995:i:5:p:1491-1515

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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. Flavio Toxvaerd, 2004. "Strategic Merger Waves: A Theory of Musical Chairs," Discussion Paper Series dp359, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
    Other versions:
  3. Han T.J. Smit & Ward A. van den Berg & Wouter De Maeseneire, 2004. "Acquisitions as a Real Options Bidding Game," Tinbergen Institute Discussion Papers 04-084/2, Tinbergen Institute, revised 23 Feb 2005. [Downloadable!]
    Other versions:
  4. Ferreira, Daniel & Ornelas, Emanuel & Turner, John L., 2007. "Unbundling Ownership and Control," CEPR Discussion Papers 6257, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Cornelli, Francesca & Felli, Leonhard, 2000. "How to Sell a (Bankrupt) Company," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  6. Eckbo, B. Espen & Thorburn, Karin S., 2004. "Bidding in mandatory bankruptcy auctions: Theory and evidence," Discussion Papers 2004/16, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
  7. Daniel Ferreira & Emanuel Ornelas & John L. Turner, 2005. "Ownership Structure and the Market for Corporate Control," IBMEC RJ Economics Discussion Papers 2005-09, Economics Research Group, IBMEC Business School - Rio de Janeiro. [Downloadable!]
  8. Yeon-Koo Che & Tracy R. Lewis, 2006. "The Role of Lockups in Takeover Contests," Discussion Papers 0607-03, Columbia University, Department of Economics. [Downloadable!]
  9. Mueller, Holger M & Panunzi, Fausto, 2003. "Tender Offers and Leverage," CEPR Discussion Papers 3964, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Eckbo, B Espen & Thorburn, Karin S, 2005. "Bidding in Mandatory Bankruptcy Auctions: Theory and Evidence," CEPR Discussion Papers 4873, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Betton, Sandra & Eckbo, B Espen & Thorburn, Karin S, 2005. "The Toehold Puzzle," CEPR Discussion Papers 5084, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Pawlina, Grzegorz & Renneboog, L.D.R., 2005. "Is investment-cash flow sensitivity caused by the agency costs or asymmetric information? Evidence from the UK," Discussion Paper 23, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  13. Per Stromberg, . "Conflicts of Interest and Market Illiquidity in Bankruptcy Auctions: Theory and Tests," CRSP working papers 459, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
    Other versions:
  14. von Kalckreuth, Ulf, 2005. "A “wreckers theory” of financial distress," Discussion Paper Series 1: Economic Studies 2005,40, Deutsche Bundesbank, Research Centre. [Downloadable!]
  15. Paul Povel & Rajdeep Singh, 2003. "Bidder Asymmetry in Takeover Contests: The Role of Deal Protection Devices," Finance 0311011, EconWPA. [Downloadable!]
  16. Claude Fluet & Paolo G. Garella, . "Relying on the Information of Others: Debt Rescheduling with Multiple Lenders," Development Working Papers 232, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
    Other versions:
  17. Martynova, Marina & Renneboog, L.D.R., 2006. "The performance of the European market for corporate control : evidence from the 5th takeover wave," Discussion Paper 118, Tilburg University, Center for Economic Research. [Downloadable!]
  18. Molin, Johan, 1996. "Optimal deterrence and inducement of takeovers: An analysis of poison pills and dilution," Working Paper Series in Economics and Finance 102, Stockholm School of Economics. [Downloadable!]
  19. Eckbo, B Espen & Thorburn, Karin S, 2002. "Overbidding versus Fire-Sales in Bankruptcy Auctions," CEPR Discussion Papers 3240, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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