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Entry and Competition in Takeover Auctions

Author

Listed:
  • Caleb Stroup

    (Department of Economics, Davidson College)

  • Matthew L. Gentry

    (Department of Economics, London School of Economics and Political Science)

Abstract

We estimate the degree of uncertainty faced by bidders in takeover auctions and quantify how it affects the ability of auctions and of negotiations to produce high prices for target shareholders. The high degree of uncertainty revealed by our structural estimation procedure degrades the quality of the entering bidder pool in auctions but increases its size, while at the same time reducing a target?s bargaining power in negotiations. In the aggregate, auctions and negotiations produce similar prices for target shareholders, even though auctions are preferred in takeover environments with high uncertainty, while the reverse is true for negotiations.

Suggested Citation

  • Caleb Stroup & Matthew L. Gentry, 2017. "Entry and Competition in Takeover Auctions," Working Papers 17-01, Davidson College, Department of Economics.
  • Handle: RePEc:dav:wpaper:17-01
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    References listed on IDEAS

    as
    1. Matthew Gentry & Tong Li, 2014. "Identification in Auctions With Selective Entry," Econometrica, Econometric Society, vol. 82(1), pages 315-344, January.
    2. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-441, October.
    3. Jeremy Bulow & Paul Klemperer, 2009. "Why Do Sellers (Usually) Prefer Auctions?," American Economic Review, American Economic Association, vol. 99(4), pages 1544-75, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Xiaohong Chen & Matthew Gentry & Tong Li & Jingfeng Lu, 2020. "Identification and Inference in First-Price Auctions with Risk Averse Bidders and Selective Entry," Cowles Foundation Discussion Papers 2257, Cowles Foundation for Research in Economics, Yale University.
    2. Xin Feng & Jingfeng Lu & Yeneng Sun, 2020. "Ex Ante Efficient Mechanism With Private Entry Costs," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1531-1541, July.
    3. Thomas R. Covert & Richard L. Sweeney, 2019. "Relinquishing Riches: Auctions vs Informal Negotiations in Texas Oil and Gas Leasing," NBER Working Papers 25712, National Bureau of Economic Research, Inc.
    4. Matthew Gentry & Tong Li & Jingfeng Lu, 2015. "Identification and estimation in first-price auctions with risk-averse bidders and selective entry," CeMMAP working papers CWP16/15, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    5. Bernhardt, Dan & Liu, Tingjun & Sogo, Takeharu, 2020. "Costly auction entry, royalty payments, and the optimality of asymmetric designs," Journal of Economic Theory, Elsevier, vol. 188(C).
    6. Gorbenko, Alexander S., 2019. "How do valuations impact outcomes of asset sales with heterogeneous bidders?," Journal of Financial Economics, Elsevier, vol. 131(1), pages 88-117.

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    More about this item

    Keywords

    Takeover Auctions; Mergers and Acquisitions;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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