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Signalling to dispersed shareholders and corporate control

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  • Burkart, Mike
  • Lee, Samuel

Abstract

This article analyses how outsiders, such as bidders or activist investors, overcome the lack of coordination and information among dispersed shareholders. We identify the two basic means to achieve this goal. First, the outsider must relinquish private benefits in a manner that is informative about security benefits. We show under which conditions this is feasible and which acquisition strategies used in practice meet these conditions. Second, the outsider can alternatively use derivatives to drive a wedge between her voting power and her economic interest in the firm. Such unbundling of ownership and control, while typically considered a source of corporate governance problems, is an efficient response to the frictions dispersed ownership causes for control contestability. We also show that unbundling comes with costs and benefits for the bidder's incentives to improve firm value.

Suggested Citation

  • Burkart, Mike & Lee, Samuel, 2015. "Signalling to dispersed shareholders and corporate control," LSE Research Online Documents on Economics 69538, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:69538
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    File URL: http://eprints.lse.ac.uk/69538/
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    Cited by:

    1. Mike Burkart & Samuel Lee, 2016. "Smart Buyers," Review of Corporate Finance Studies, Oxford University Press, vol. 5(2), pages 239-270.
    2. Burkart, Mike & Lee, Samuel, 2018. "Activism and Takeovers," CEPR Discussion Papers 12616, C.E.P.R. Discussion Papers.
    3. Liu, Tingjun & Bernhardt, Dan, 2019. "Optimal equity auctions with two-dimensional types," Journal of Economic Theory, Elsevier, vol. 184(C).

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    More about this item

    Keywords

    Tender offers; Investor activism; Signalling; Free-rider problem; Means of payment; Unbundling; Ownership and control; Empty voting;
    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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