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The Dynamics of the Free-Rider Problem in Takeovers

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  • Harrington, Joseph E, Jr
  • Prokop, Jacek

Abstract

We explore the dynamics of a takeover bid. In contrast to preceding models, if the initial takeover bid is unsuccessful a raider is allowed to make a new tender offer in order to try and secure the remaining shares. Numerical analysis shows that the raider's tender offer rises over time as he accumulates more shares. The anticipation of a higher tender offer in the future makes shareholders more inclined to bold their shares and forces the raider to offer a higher premium than is predicted by static theories. As the time between tender offers goes to zero, we show analytically that the expected profit from engaging in a takeover goes to zero. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Harrington, Joseph E, Jr & Prokop, Jacek, 1993. "The Dynamics of the Free-Rider Problem in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 851-882.
  • Handle: RePEc:oup:rfinst:v:6:y:1993:i:4:p:851-82
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    References listed on IDEAS

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    Cited by:

    1. repec:oup:rcorpf:v:1:y:2012:i:1:p:1-27. is not listed on IDEAS
    2. Matias Iaryczower & Santiago Oliveros, 2017. "Competing for Loyalty: The Dynamics of Rallying Support," American Economic Review, American Economic Association, vol. 107(10), pages 2990-3005, October.
    3. Fluck, Zsuzsanna, 1999. "The Dynamics of the Management-Shareholder Conflict," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 379-404.
    4. Mehmet Ekmekci & Nenad Kos, 2016. "Information in Tender Offers With a Large Shareholder," Econometrica, Econometric Society, vol. 84, pages 87-139, January.
    5. Armo Gomes, 2001. "Takeovers, Freezeouts, and Risk Arbitrage," Penn CARESS Working Papers c4679b705ea88aebda985c6da, Penn Economics Department.
    6. Moresi, Serge, 2000. "Information acquisition and research differentiation prior to an open-bid auction1," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 723-746, July.
    7. Carroll, Carolyn & Griffith, John M., 2010. "Toeholds, rejected offers, and bidder gains: Do rebuffed bidders put targets in play to profit from their toeholds?," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 214-221, May.
    8. Nico Rottke & Dirk Schiereck & Stephan Pauser, 2011. "M&A in the Construction Industry -Wealth Effects of Diversification into Real Estate Life Cycle Related Services," International Real Estate Review, Asian Real Estate Society, vol. 14(3), pages 283-310.
    9. Francesca Cornelli & David D. Li, 2002. "Risk Arbitrage in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 837-868.
    10. Prokop, Jacek, 2003. "Conditional versus unconditional bidding in takeovers," Research in Economics, Elsevier, vol. 57(2), pages 123-149, June.
    11. Ann B. Gillette & Thomas H. Noe, 2000. "If at first you don't succeed: an experimental investigation of the impact of repetition options on corporate takeovers," FRB Atlanta Working Paper 2000-9, Federal Reserve Bank of Atlanta.
    12. repec:esx:essedp:768 is not listed on IDEAS
    13. Jon D. Harford, 1997. "Firm ownership patterns and motives for voluntary pollution control," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(6), pages 421-431.
    14. Ann B. Gillette & Thomas H. Noe, 2006. "If at First You Don't Succeed: The Effect of the Option to Resolicit on Corporate Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 561-603.
    15. Liebler, Robert J., 1997. "Tender offers to influential shareholders," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 529-540, April.
    16. Maug, Ernst, 2006. "Efficiency and fairness in minority freezeouts: Takeovers, overbidding, and the freeze-in problem," International Review of Law and Economics, Elsevier, vol. 26(3), pages 355-379, September.
    17. Bilge Yilmaz, "undated". "A Theory of Takeover Bidding," Rodney L. White Center for Financial Research Working Papers 03-00, Wharton School Rodney L. White Center for Financial Research.
    18. Ferguson, Michael F, 1994. "Ownership Structure, Potential Competition, and the Free-Rider Problem in Tender Offers," Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(1), pages 35-62, April.
    19. Asquith, Daniel & Kieschnick, Robert, 1999. "An Examination of Initial Shareholdings in Tender Offer Bids," Review of Quantitative Finance and Accounting, Springer, vol. 12(2), pages 171-188, March.
    20. Bilge Yilmaz, "undated". "A Theory of Takeover Bidding," Rodney L. White Center for Financial Research Working Papers 3-00, Wharton School Rodney L. White Center for Financial Research.
    21. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
    22. Francesca Cornelli & David D. Li, "undated". "Risk Arbitrage in Takeovers," Rodney L. White Center for Financial Research Working Papers 17-98, Wharton School Rodney L. White Center for Financial Research.
    23. Cornelli, Francesca & Li, David Daokui, 1998. "Risk Arbitrage in Takeovers," CEPR Discussion Papers 2026, C.E.P.R. Discussion Papers.
    24. Noe, Thomas H, 1998. "Rationalizable and Coalition Proof Shareholder Tendering Strategies in Corporate Takeovers," Review of Quantitative Finance and Accounting, Springer, vol. 11(3), pages 269-291, November.

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