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Takeover Contests, Toeholds and Deterrence

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  • David Ettinger

Abstract

We consider a setting in which two potential buyers, one with a prior toehold and one without, compete in a takeover modeled as an ascending auction with participating costs. The toeholder is more aggressive during the takeover process because she is also a seller of her own shares. The non-toeholder anticipates this extra-aggressiveness of the toeholder. Thus, he is deterred from participating unless he has a high valuation for the target company. This leads to large inefficiency losses. For many configurations, expected target returns are first increasing then decreasing in the size of the toehold. Copyright � The editors of the "Scandinavian Journal of Economics" 2009 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 111 (2009)
Issue (Month): 1 (03)
Pages: 103-124

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Handle: RePEc:bla:scandj:v:111:y:2009:i:1:p:103-124

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  1. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  2. Choi, Dosoung, 1991. "Toehold Acquisitions, Shareholder Wealth, and the Market for Corporate Control," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(03), pages 391-407, September.
  3. Hirshleifer, David & Titman, Sheridan, 1990. "Share Tendering Strategies and the Success of Hostile Takeover Bids," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 295-324, April.
  4. Berkovitch, Elazar & Narayanan, M. P., 1993. "Motives for Takeovers: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(03), pages 347-362, September.
  5. Maasland, E. & Onderstal, A.M., 2002. "Auctions with Financial Externalities," Discussion Paper, Tilburg University, Center for Economic Research 2002-22, Tilburg University, Center for Economic Research.
  6. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(4), pages 841-82.
  7. Tan, Guofu & Yilankaya, Okan, 2006. "Equilibria in second price auctions with participation costs," Journal of Economic Theory, Elsevier, vol. 130(1), pages 205-219, September.
  8. Stulz, Rene M & Walkling, Ralph A & Song, Moon H, 1990. " The Distribution of Target Ownership and the Division of Gains in Successful Takeovers," Journal of Finance, American Finance Association, American Finance Association, vol. 45(3), pages 817-33, July.
  9. Rajdeep Singh, 1995. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," Finance, EconWPA 9503001, EconWPA.
  10. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(3), pages 427-454, June.
  11. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
  12. Eckbo, B. Espen & Langohr, Herwig, 1989. "Information disclosure, method of payment, and takeover premiums : Public and private tender offers in France," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(2), pages 363-403.
  13. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 21(1), pages 3-40, May.
  14. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 5(2), pages 225-48, Fall.
  15. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 25-54, January.
  16. Betton, Sandra & Eckbo, B Espen & Thorburn, Karin S, 2005. "The Toehold Puzzle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5084, C.E.P.R. Discussion Papers.
  17. Burkart, Mike, 1995. " Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1491-1515, December.
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Cited by:
  1. Loyola, Gino, 2012. "Auctions vs. negotiations in takeovers with initial stakes," Finance Research Letters, Elsevier, Elsevier, vol. 9(3), pages 111-120.
  2. Loyola, Gino, 2012. "Optimal and efficient takeover contests with toeholds," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 21(2), pages 203-216.
  3. Iryna Banakh & Taras Banakh & Pavel Trisch & Myroslava Vovk, 2012. "Toehold Purchase Problem: A comparative analysis of two strategies," Papers 1204.2065, arXiv.org, revised Sep 2014.

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