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Security-voting structure and bidder screening

Author

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  • At, Christian
  • Burkart, Mike
  • Lee, Samuel

Abstract

This paper analyzes how non-voting shares affect the takeover outcome in a single-bidder model with asymmetric information and private benefit extraction. In equilibrium, the target firm’s security-voting structure influences the bidder’s participation constraint and in response the shareholders’ conditional expectations about the post-takeover share value. Therefore, the structure can be chosen to discriminate among bidder types. Typically, the socially optimal structure deviates from one share - one vote to promote all and only value-increasing bids. As target shareholders ignore takeover costs, they prefer more takeovers and hence choose a smaller fraction of voting shares than is socially optimal. In either case, the optimal fraction of voting shares decreases with the quality of shareholder protection and increases with the incumbent manager’s ability. Finally, shareholder returns are higher when a given takeover probability is implemented by (more) non-voting shares rather than by (larger) private benefits.

Suggested Citation

  • At, Christian & Burkart, Mike & Lee, Samuel, 2007. "Security-voting structure and bidder screening," LSE Research Online Documents on Economics 24473, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:24473
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    File URL: http://eprints.lse.ac.uk/24473/
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    References listed on IDEAS

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    Cited by:

    1. repec:ipg:wpaper:2014-604 is not listed on IDEAS
    2. Sergey Stepanov, 2012. "Takeovers under Asymmetric Information: Block Trades and Tender Offers in Equilibrium," Working Papers w0185, Center for Economic and Financial Research (CEFIR).
    3. Bo Becker & Jens Josephson, 2016. "Insolvency Resolution and the Missing High-Yield Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2814-2849.
    4. Mike Burkart & Samuel Lee, 2010. "Signaling in Tender Offer Games," FMG Discussion Papers dp655, Financial Markets Group.
    5. At, Christian & Morand, Pierre-Henri, 2008. "Jump bidding in ascending auctions: The case of takeover contests," Economics Letters, Elsevier, vol. 99(3), pages 458-460, June.
    6. repec:ipg:wpaper:2014-531 is not listed on IDEAS
    7. Mike Burkart & Samuel Lee, 2008. "One Share - One Vote: the Theory," Review of Finance, European Finance Association, vol. 12(1), pages 1-49.
    8. repec:oup:rcorpf:v:1:y:2012:i:1:p:1-27. is not listed on IDEAS
    9. Mike Burkart & Samuel Lee, 2015. "Signalling to Dispersed Shareholders and Corporate Control," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 922-962.
    10. repec:eee:jfinec:v:126:y:2017:i:3:p:614-634 is not listed on IDEAS

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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