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Security-Voting Structure and Bidder Screening

  • Samuel Lee
  • Christian At
  • Mike Burkart

    ()

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.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp575.

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Date of creation: Feb 2007
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Handle: RePEc:fmg:fmgdps:dp575
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  16. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
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