Entry and Competition in Takeover Auctions

We estimate the degree of uncertainty faced by bidders in takeover auctions and quantify how it affects the ability of auctions and of negotiations to produce high prices for target shareholders. The high degree of uncertainty revealed by our structural estimation procedure degrades the quality of the entering bidder pool in auctions but increases its size, while at the same time reducing a target?s bargaining power in negotiations. In the aggregate, auctions and negotiations produce similar prices for target shareholders, even though auctions are preferred in takeover environments with high uncertainty, while the reverse is true for negotiations.