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Takeovers under Asymmetric Information: Block Trades and Tender Offers in Equilibrium

  • Sergey Stepanov

    ()

    (New Economic School and CEFIR)

I study transfers of control in a rm having atomistic shareholders and one dominant minority blockholder (incumbent). A potential acquirer can try to negotiate a block trade with the incumbent. If the negotiations are successful, the control changes hands via a block trade. If the negotiations fail, the acquirer can launch a public tender offer. According to empirical evidence, companies with minority blockholders are widespread, and both types of transactions occur in such companies. However, the existing models that allow for acquiring control through a block trade never obtain tender offers in equilibrium. In my model, asymmetry of information about the acquirer’s ability to generate value leads to the negotiations failure and, hence, results in a tender offer for a range of parameters. In such an equilibrium, high ability acquirers take over the rm by means of a tender offer, intermediate types negotiate a block trade, and low types do not attempt any transaction. This result provides an immediate explanation for higher target announcement returns in tender o¤ers as compared to block trades. The model also explains why takeover premiums and targets’stock price reaction to tender offers may be higher in countries with stronger shareholder protection and predicts that better shareholder protection should result in a higher announcements returns for targets in block trade transactions as well. Finally, the paper obtains that transfers of corporate control in rms with a dominant minority blockholder are more efficient when shareholder protection is better and provides an argument against the mandatory bid rule in strong legal regimes.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0185.

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Length: 39 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:cfr:cefirw:w0185
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  1. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
  2. At, Christian & Burkart, Mike & Lee, Samuel, 2007. "Security-Voting Structure and Bidder Screening," CEPR Discussion Papers 6241, C.E.P.R. Discussion Papers.
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  12. Arturo Bris & Christos Cabolis, 2005. "The Value of Investor Protection: Firm Evidence from Cross-Border Mergers," Yale School of Management Working Papers amz2455, Yale School of Management.
  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.
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