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The Takeover Game

Author

Listed:
  • Sascha F llbrunn
  • Ernan Haruvy

    (LSF)

Abstract

While shareholders direct influence on management decisions may be small, the takeover threat could serve as an indirect but effective mechanism for shareholders to influence management. We introduce the takeover game, an experimental asset market characterized by two important features: (1) periodic dividend payments to shareholders are endogenously decided by management, and (2) shareholders can accept an outside tender offer to depose management. Investors trade shares in a double auction market that pays a dividend at the end of each period determined solely by the manager, and decide whether to accept a takeover offers made in pre-determined periods. This novel setting has the flavor of a repeated trust game, but allows the shareholders, through a market mechanism, to price the amount of trust they have in management. Despite the unique subgame perfect equilibrium outcome in which the first takeover offer is accepted and no dividends are ever paid out, we find that the market often survives takeover offers. Managers pay positive dividends and appear to do so strategically taking into account periods in which takeover offers will be made. While prices are not directly responsive to dividends, we find that market prices are a good indication of when shareholders intend to accept the takeover offer.

Suggested Citation

  • Sascha F llbrunn & Ernan Haruvy, 2011. "The Takeover Game," LSF Research Working Paper Series 11-5, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:11-5
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    File URL: http://wwwen.uni.lu/content/download/53149/634688/file/The%20Takeover%20Game_2011%20(5).pdf
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    Cited by:

    1. Owen Powell & Natalia Shestakova, 2017. "Experimental asset markets: behavior and bubbles," Chapters, in: Morris Altman (ed.), Handbook of Behavioural Economics and Smart Decision-Making, chapter 21, pages 375-391, Edward Elgar Publishing.

    More about this item

    Keywords

    Corporate Finance; Payout Policy; Takeover; Asset Market; Trust Game; Experiment;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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