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Just Enough or All: Selling a Firm

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  • Mehmet Ekmekci
  • Nenad Kos
  • Rakesh Vohra

Abstract

We consider the problem of selling a firm to a single buyer. The magnitude of the post-sale cash flow rights (v) as well as the benefits of control (b) are the buyer’s private information. In contrast to research that assumes the private information of the buyer is one-dimensional, the optimal mechanism is a menu of tuples of cashequity mixtures. We provide sufficient conditions on the joint distribution of v and b such that the optimal mechanism takes one of the following forms: i) a take-it or leave-it offer for the smallest fraction of the company that facilitates the transfer of control, or ii) a take-it or leave-it offer for all the shares of the company. We also identify a sufficient condition for the seller to extract the full value, v, per share so that the buyer earns information rents only on the private benefits of control. JEL Code: D82, D86. Keywords: Multidimensional mechanism design, negotiated block trades, private benefits, privatization, takeovers, bilateral trade, asymmetric information, cashequity offers.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 470.

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Date of creation: 2013
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Handle: RePEc:igi:igierp:470

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  1. Yeon-Koo Che & Jinwoo Kim, 2009. "Bidding With Securities: Comment," Discussion Papers, Columbia University, Department of Economics 0809-10, Columbia University, Department of Economics.
  2. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, Elsevier, vol. 46(2), pages 335-354, December.
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  4. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, American Finance Association, vol. 44(1), pages 41-57, March.
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  6. Renée Birgit Adams & Francesca Cornelli & Leonardo Felli, 2012. "How to Sell a (Bankrupt) Company," International Review of Finance, International Review of Finance Ltd., International Review of Finance Ltd., vol. 12(2), pages 197-226, 06.
  7. Kos, Nenad & Messner, Matthias, 2013. "Extremal incentive compatible transfers," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(1), pages 134-164.
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  9. 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, Society for Financial Studies, vol. 3(4), pages 651-75.
  10. Mehmet Ekmekci & Nenad Kos, 2012. "Information in tender offers with a large shareholder," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 453, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 862-65, September.
  12. Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, Elsevier, vol. 92(2), pages 198-233, June.
  13. Dodd, Peter & Warner, Jerold B., 1983. "On corporate governance : A study of proxy contests," Journal of Financial Economics, Elsevier, Elsevier, vol. 11(1-4), pages 401-438, April.
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  15. Berkovitch, Elazar & Narayanan, M P, 1990. "Competition and the Medium of Exchange in Takeovers," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(2), pages 153-74.
  16. Zingales, Luigi, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(3), pages 425-48, July.
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Cited by:
  1. Marco Pagnozzi & Antonio Rosato, 2014. "Entry by Takeover: Auctions vs. Negotiations," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 353, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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