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Preemptive bidding in takeover auctions with externality

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  • Dodonova, Anna

Abstract

This paper analyzes the preemptive jump bidding equilibrium in takeover auctions when the acquisition of the target firm by one of the bidders may affect the profit of the other bidder. It shows that such externality has no effect on the preemption rate but affects the size of the jump bid required to preempt competition. Namely, the required jump bid is lower in the presence of positive externality and it is higher when the externality is negative. Preemptive bidding does not affect the expected profit of the second bidder, increases the expected profit of the first bidder and leads to lower expected profit of the seller. The effect of the jump bidding on the seller's profit and the social surplus negatively depends on the externality.

Suggested Citation

  • Dodonova, Anna, 2013. "Preemptive bidding in takeover auctions with externality," Journal of Economics and Business, Elsevier, vol. 69(C), pages 35-44.
  • Handle: RePEc:eee:jebusi:v:69:y:2013:i:c:p:35-44
    DOI: 10.1016/j.jeconbus.2013.05.002
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    More about this item

    Keywords

    Jump bidding; Preemptive bidding; Signaling; Externality; Takeover auction;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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