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Participation Costs and Inefficiency in Takeover Contests

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  • Didier Dègnidé Hounwanou

    (Centre de Recherches sur les Stratégies Economiques, University of Franche-Comté, 25000 Besançon, France)

Abstract

We consider a takeover in which risk neutral bidders incur private costs when they participate in the auction. Supposing that valuations for a target firm are common knowledge, we study the optimal strategy of bidders and analyze the takeover result when they get or do not get toeholds in the target firm. We find that bidders’ decision of participation is endogenous. By analyzing bidders’ condition of participation, we find that there is a probability that the potential bidder with the highest valuation does not participate in the control. We show that this probability increases with the size of toeholds possessed by the bidder with a low valuation. Nevertheless, a larger size of toeholds possessed by the bidder with the highest valuation increases the probability of his participation in the auction. Asymmetric toeholds between potential bidders can accentuate inefficient allocation when participation costs are private information. However, if the bidder with toeholds deters completely bidders without toeholds in private valuation setting (Ettinger [Ettinger D (2009) Takeover contests, toeholds and deterrence. Scandinavian J. Econom. 111(1):103–124.]), the results of the current papers show that the phenomenon of fully deterring is destroyed when valuations are common knowledge.

Suggested Citation

  • Didier Dègnidé Hounwanou, 2018. "Participation Costs and Inefficiency in Takeover Contests," Decision Analysis, INFORMS, vol. 15(1), pages 1-10, March.
    • Handle: RePEc:inm:ordeca:v:15:y:2018:i:1:p:1-10
    DOI: 10.1287/deca.2017.0356
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    Cited by:

    1. Yuri Khoroshilov, 2018. "Partnership Dissolution: Information and Efficiency+," Decision Analysis, INFORMS, vol. 15(3), pages 133-138, September.
    2. Vicki M. Bier & Simon French, 2020. "From the Editors: Decision Analysis Focus and Trends," Decision Analysis, INFORMS, vol. 17(1), pages 1-8, March.
    3. Anna Dodonova & Yuri Khoroshilov, 2021. "Private Value Takeover Auctions with Toeholds: An Experimental Study," Games, MDPI, vol. 12(2), pages 1-10, May.
    4. Dodonova, Anna & Khoroshilov, Yuri, 2020. "Preemptive bidding in common value takeover auctions: Social surplus and the target’s revenue," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).

    More about this item

    Keywords

    auction; takeover; toeholds;
    All these keywords.

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