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Signalling in tender offer games

Author

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  • Burkart, Mike
  • Lee, Samuel

Abstract

We examine whether a bidder can use tender o§er terms to signal post-takeover security benefits. Neither restricted bids nor cash-equity offers allow the bidder to reveal private information. Since atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models: The bidder must enjoy gains from trade that are excluded from bargaining (private benefits) but can nonetheless be relinquished. Dilution, debt financing, and toeholds are viable signaling devices because they imply private benefits that depend on security benefits in a predictable manner. In these signaling equilibria, lower-valued types must forgo a larger fraction of their private gains, and these costs can prevent some takeovers. Strikingly, the separation of cash flow and voting rights overcomes the asymmetric information problem. Offers that include derivatives allow for a complete separation and can therefore implement the symmetric information outcome.

Suggested Citation

  • Burkart, Mike & Lee, Samuel, 2010. "Signalling in tender offer games," LSE Research Online Documents on Economics 119085, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119085
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    File URL: http://eprints.lse.ac.uk/119085/
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    signaling; free-rider problem; means of payment; restricted bids; two-dimensional types;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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