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Initial Shareholdings and Overbidding in Takeover Contests

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  • Burkart, Mike

Abstract

Within the context of takeovers, this paper shows that in private-value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e., to bid more than his valuation. This strategy, however, can lead to an inefficient outcome and the winning bidder making a net loss. Further, the overbidding result implies that the presence of a large shareholder increases the bid premium in single-bidder takeovers at the expense of reducing the probability of the takeover actually occurring. Copyright 1995 by American Finance Association.

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  • Burkart, Mike, 1995. "Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December.
    • Handle: RePEc:bla:jfinan:v:50:y:1995:i:5:p:1491-1515
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