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Toehold Strategies, Takeover Laws And Rival Bidders

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  • S. Ravid
  • Matthew Spiegel
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    Abstract

    Prior to the announcement of a tender offer, the bidding firm is legally allowed to acquire shares in the open market, subject to some limitations. These pre-announcement purchases are known as toeholds. This paper presents a simple model that describes the bidder's optimal toehold acquisition strategy, within an environment that closely parallels the present legal institutions. The model shows that toeholds and bids interact in a complex manner even without the presence of asymmetric information. By examining a simple environment the paper provides a useful alternative hypothesis for tests of other, presumably more complex, models. One of the main implications of our model is that if no competing bidders are expected, no toeholds should be purchased. Indeed, under a wide variety of conditions small toeholds are optimal. The paper also demonstrates that the correct specification of an empirical model can be critical. For example, under some parameter values toehold purchases may exhibit a negative cross-sectional correlation with the pre-announcement run up in the stock

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm112.

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    Date of creation: 01 Feb 1999
    Date of revision: 01 Jan 2001
    Handle: RePEc:ysm:somwrk:ysm112

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    Web page: http://icf.som.yale.edu/
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    References

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    1. Rajdeep Singh, 1995. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," Finance 9503001, EconWPA.
    2. Lucian Arye Bebchuk, 1995. "Efficient and Inefficient Sales of Corporate Control," NBER Working Papers 4788, National Bureau of Economic Research, Inc.
    3. Chowdhry, Bhagwan & Jegadeesh, Narasimhan, 1994. "Pre-Tender Offer Share Acquisition Strategy in Takeovers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 117-129, March.
    4. Karpoff, Jonathan M. & Malatesta, Paul H., 1989. "The wealth effects of second-generation state takeover legislation," Journal of Financial Economics, Elsevier, vol. 25(2), pages 291-322, December.
    5. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
    6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    7. Michael J. Fishman, 1988. "A Theory of Preemptive Takeover Bidding," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 88-101, Spring.
    8. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 21-48, Winter.
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    Cited by:
    1. Lindqvist, Tobias, 2004. "Mergers by Partial Acquisition," Working Paper Series 630, Research Institute of Industrial Economics.
    2. Sanjai Bhagat & Ming Dong & David A. Hirshleifer & Robert B. Noah, 2004. "Do Tender Offers Create Value? New Methods and Evidence," Finance 0412011, EconWPA.

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