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Just Enough or All: Selling a Firm

  • Mehmet Ekmekci
  • Nenad Kos
  • Rakesh Vohra

We consider the problem of selling a firm to a single buyer. The magnitude of the post-sale cash flow rights (v) as well as the benefits of control (b) are the buyer’s private information. In contrast to research that assumes the private information of the buyer is one-dimensional, the optimal mechanism is a menu of tuples of cashequity mixtures. We provide sufficient conditions on the joint distribution of v and b such that the optimal mechanism takes one of the following forms: i) a take-it or leave-it offer for the smallest fraction of the company that facilitates the transfer of control, or ii) a take-it or leave-it offer for all the shares of the company. We also identify a sufficient condition for the seller to extract the full value, v, per share so that the buyer earns information rents only on the private benefits of control. JEL Code: D82, D86. Keywords: Multidimensional mechanism design, negotiated block trades, private benefits, privatization, takeovers, bilateral trade, asymmetric information, cashequity offers.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 470.

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Date of creation: 2013
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Handle: RePEc:igi:igierp:470
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  1. Francesca Cornelli & Leonardo Felli, 2010. "How to sell a (bankrupt) company?," LSE Research Online Documents on Economics 4685, London School of Economics and Political Science, LSE Library.
  2. Yeon-Koo Che & Jinwoo Kim, 2010. "Bidding with Securities: Comment," American Economic Review, American Economic Association, vol. 100(4), pages 1929-35, September.
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  9. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 740-45, September.
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  16. Mehmet Ekmekci & Nenad Kos, 2012. "Information in tender offers with a large shareholder," Working Papers 453, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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