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Takeovers under Asymmetric Information: Block Trades and Tender Offers in Equilibrium

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Author Info

  • Sergey Stepanov

    ()
    (New Economic School and CEFIR)

Abstract

I study transfers of control in a rm having atomistic shareholders and one dominant minority blockholder (incumbent). A potential acquirer can try to negotiate a block trade with the incumbent. If the negotiations are successful, the control changes hands via a block trade. If the negotiations fail, the acquirer can launch a public tender offer. According to empirical evidence, companies with minority blockholders are widespread, and both types of transactions occur in such companies. However, the existing models that allow for acquiring control through a block trade never obtain tender offers in equilibrium. In my model, asymmetry of information about the acquirer’s ability to generate value leads to the negotiations failure and, hence, results in a tender offer for a range of parameters. In such an equilibrium, high ability acquirers take over the rm by means of a tender offer, intermediate types negotiate a block trade, and low types do not attempt any transaction. This result provides an immediate explanation for higher target announcement returns in tender o¤ers as compared to block trades. The model also explains why takeover premiums and targets’stock price reaction to tender offers may be higher in countries with stronger shareholder protection and predicts that better shareholder protection should result in a higher announcements returns for targets in block trade transactions as well. Finally, the paper obtains that transfers of corporate control in rms with a dominant minority blockholder are more efficient when shareholder protection is better and provides an argument against the mandatory bid rule in strong legal regimes.

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Bibliographic Info

Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0185.

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Length: 39 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:cfr:cefirw:w0185

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Related research

Keywords: Takeovers; block trades; tender offers; shareholder protection; mandatory bid rule;

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References

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  1. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
  2. Jun-Koo Kang & Jin-Mo Kim, 2008. "The Geography of Block Acquisitions," Journal of Finance, American Finance Association, vol. 63(6), pages 2817-2858, December.
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  4. Barclay, Michael J & Holderness, Clifford G, 1991. " Negotiated Block Trades and Corporate Control," Journal of Finance, American Finance Association, vol. 46(3), pages 861-78, July.
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  14. Hirshleifer, David & Titman, Sheridan, 1990. "Share Tendering Strategies and the Success of Hostile Takeover Bids," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 295-324, April.
  15. Trojanowski, Grzegorz, 2008. "Equity block transfers in transition economies: Evidence from Poland," Economic Systems, Elsevier, vol. 32(3), pages 217-238, September.
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  17. Jeffrey W. Allen & Gordon M. Phillips, 2000. "Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships," Journal of Finance, American Finance Association, vol. 55(6), pages 2791-2815, December.
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