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Takeover Bidding with Toeholds: The Case of the Owner's Curse

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  • Rajdeep Singh

    (Olin School of Business,Washington University)

Abstract

This paper demonstrates that winning a takeover bidding contest can be `bad news' and, consequently, losing can be `good news.' This is true even when all bidders act rationally in their own best interests with perfect information on their valuations. Bidders with toeholds rationally bid above their valuations and possibly suffer losses in equilibrium. This equilibrium strategy of `bidding to lose' played by partial owners leads to the `owner's curse.' The paper provides an explanation for acquirer losses without recourse to managerial `hubris' and/or agency problems. The presence of partial owners also has strong implications for the choice of selling mechanisms: firms should not be sold using a first price sealed-bid auction. The presence of large blockholders also acts as a costless defensive measure and partially substitutes for other costly defensive measures. The model gives rise to predictions on (1) the type of acquirers more likely to make losses; (2) the choice of auction procedures; (3) the effect of managerial ownership on firm value; (4) the existence of initial bid premia; and (5) the incentives of firms to engage in share repurchase, private placement and debt-for-equity swaps in the face of a takeover threat.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9503001.

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Length: 36 pages
Date of creation: 09 Mar 1995
Date of revision:
Handle: RePEc:wpa:wuwpfi:9503001

Note: 36 pages, postscript file and the compressed postscript file.
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  1. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  2. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
  3. 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.
  4. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
  5. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  6. Hirshleifer, David, 1989. "Facilitation of Competing Bids and the Price of a Takeover Target," University of California at Los Angeles, Anderson Graduate School of Management qt2496649g, Anderson Graduate School of Management, UCLA.
  7. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-64.
  8. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
  9. Mark Bagnoli, Barton L. Lipman, 1988. "Successful Takeovers without Exclusion," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 89-110.
  10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  11. 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.
  12. 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.
  13. 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.
  14. Berkovitch, Elazar & Narayanan, M. P., 1993. "Motives for Takeovers: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 347-362, September.
  15. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
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