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Security-Voting Structure and Bidder Screening

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  • At, Christian
  • Burkart, Mike
  • Lee, Samuel

Abstract

This paper analyzes how non-voting shares affect the takeover outcome in a single-bidder model with asymmetric information and private benefit extraction. In equilibrium, the target firm's security-voting structure influences the bidder's participation constraint and in response the shareholders' conditional expectations about the post-takeover share value. Therefore, the structure can be chosen to discriminate among bidder types. Typically, the socially optimal structure deviates from one share - one vote to promote all and only value-increasing bids. As target shareholders ignore takeover costs, they prefer more takeovers and hence choose a smaller fraction of voting shares than is socially optimal. In either case, the optimal fraction of voting shares decreases with the quality of shareholder protection and increases with the incumbent manager's ability. Finally, shareholder returns are higher when a given takeover probability is implemented by (more) non-voting shares rather than by (larger) private benefits.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6241.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6241

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Keywords: dual-class share structure; free-rider behaviour; tender offer;

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References

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  1. Lucian A. Bebchuk & Luigi Zingales, 2000. "Ownership Structures and the Decision to Go Public: Private versus Social Optimality," NBER Chapters, in: Concentrated Corporate Ownership, pages 55-80 National Bureau of Economic Research, Inc.
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  17. Sanford J. Grossman & Oliver D. Hart, . "The Allocational Role of Takeover Bids in Situations of Asymmetric Information," Rodney L. White Center for Financial Research Working Papers 06-80, Wharton School Rodney L. White Center for Financial Research.
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Citations

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Cited by:
  1. Sergey Stepanov, 2012. "Takeovers under Asymmetric Information: Block Trades and Tender Offers in Equilibrium," Working Papers w0185, Center for Economic and Financial Research (CEFIR).
  2. Burkart, Mike & Lee, Samuel, 2010. "Signaling in Tender Offer Games," CEPR Discussion Papers 7938, C.E.P.R. Discussion Papers.
  3. At, Christian & Morand, Pierre-Henri, 2008. "Jump bidding in ascending auctions: The case of takeover contests," Economics Letters, Elsevier, vol. 99(3), pages 458-460, June.
  4. Bo Becker & Jens Josephson, 2013. "Insolvency Resolution and the Missing High Yield Bond Markets," NBER Working Papers 19415, National Bureau of Economic Research, Inc.

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