Advanced Search
MyIDEAS: Login to save this paper or follow this series

Tender Offers and Leverage

Contents:

Author Info

  • Mueller, Holger M
  • Panunzi, Fausto
Registered author(s):

    Abstract

    We examine whether, and why, it matters how tender offers for widely held firms are financed. If tender offers are financed with debt, the positive effect of a synergy gain or value improvement on the combined firm’s equity is partly offset by the simultaneous increase in debt. Dispersed target shareholders then only appropriate part of the value improvement, which mitigates the free-rider problem. Bankruptcy costs, incentive problems on the part of the raider, and defensive leveraged recapitalizations and asset sales by the target management are all counter-forces to high bidder leverage, thereby shifting takeover gains to target shareholders and causing takeovers to fail. While bankruptcy costs are a social cost, the takeover premium is merely a wealth transfer between the raider and target shareholders. As the raider does not internalize this, they use too much debt relative to the social optimum.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.cepr.org/pubs/dps/DP3964.asp
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3964.

    as in new window
    Length:
    Date of creation: Jul 2003
    Date of revision:
    Handle: RePEc:cpr:ceprdp:3964

    Contact details of provider:
    Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
    Phone: 44 - 20 - 7183 8801
    Fax: 44 - 20 - 7183 8820

    Order Information:
    Email:

    Related research

    Keywords: free-rider problem; leverage; tender offers;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Sanford J. Grossman & Oliver D. Hart, 1987. "One Share/One Vote and the Market for Corporate Control," NBER Working Papers 2347, National Bureau of Economic Research, Inc.
    2. Laurie Simon Bagwell, 1991. "Share Repurchase and Takeover Deterrence," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 72-88, Spring.
    3. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    4. Zingales, Luigi, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Wiley Blackwell, vol. 62(3), pages 425-48, July.
    5. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-75.
    6. Billett, Matthew T, 1996. "Targeting Capital Structure: The Relationship between Risky Debt and the Firm's Likelihood of Being Acquired," The Journal of Business, University of Chicago Press, vol. 69(2), pages 173-92, April.
    7. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February.
    8. Israel, Ronen, 1991. " Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing," Journal of Finance, American Finance Association, vol. 46(4), pages 1391-1409, September.
    9. Burkart, Mike, 1995. " Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December.
    10. 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.
    11. Chowdhry, Bhagwan & Nanda, Vikram, 1993. " The Strategic Role of Debt in Takeover Contests," Journal of Finance, American Finance Association, vol. 48(2), pages 731-45, June.
    12. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, vol. 44(1), pages 41-57, March.
    13. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
    14. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    15. Schwert, G. William, 1996. "Markup pricing in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 41(2), pages 153-192, June.
    16. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
    17. Warga, Arthur & Welch, Ivo, 1993. "Bondholder Losses in Leveraged Buyouts," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 959-82.
    18. Perotti, E.C. & Spier, K.E., 1991. "Capital Structure As A Bargaining Tool: The Role Of Leverage In Contract Renegociation," Harvard Institute of Economic Research Working Papers 1548, Harvard - Institute of Economic Research.
    19. Scherer, F M, 1988. "Corporate Takeovers: The Efficiency Arguments," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 69-82, Winter.
    20. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    21. Song, Moon H. & Walkling, Ralph A., 1993. "The Impact of Managerial Ownership on Acquisition Attempts and Target Shareholder Wealth," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 439-457, December.
    22. Walkling, Ralph A., 1985. "Predicting Tender Offer Success: A Logistic Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 461-478, December.
    23. 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.
    24. Maloney, Michael T & McCormick, Robert E & Mitchell, Mark L, 1993. "Managerial Decision Making and Capital Structure," The Journal of Business, University of Chicago Press, vol. 66(2), pages 189-217, April.
    25. Holmstrom, Bengt & Nalebuff, Barry, 1992. "To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 37-62, Spring.
    26. Berkovitch, Elazar & Narayanan, M P, 1990. "Competition and the Medium of Exchange in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 153-74.
    27. Mark Bagnoli, Barton L. Lipman, 1988. "Successful Takeovers without Exclusion," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 89-110.
    28. Zwiebel, Jeffrey, 1996. "Dynamic Capital Structure under Managerial Entrenchment," American Economic Review, American Economic Association, vol. 86(5), pages 1197-1215, December.
    29. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
    30. Mahoney, Paul G & Weinstein, Mark, 1999. "The Appraisal Remedy and Merger Premiums," American Law and Economics Review, Oxford University Press, vol. 1(1-2), pages 239-75, Fall.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3964. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.