Takeover Bidding and Shareholder Information

Abstract

We study the role of shareholder information in affecting the decision whether to tender one's shares when a takeover bid is announced. In the context of the well-known "free-rider" problem associated with the takeover of widely held firms, we demonstrate that profitable takeovers are possible even with no prior holdings or ex post dilution as long as there is uncertainty regarding the motivation for the takeover attempt. We then show that providing shareholders with superior information about the value of their firm aggravates the free-rider problem since it allows them to hold out precisely when a raider is likely to create the most value. This leads to higher prices conditional on a tender offer being made, but also reduces the incentive for a raider to identify a good target and make an offer, thus reducing activity in the market for corporate control. We study implications of the design of the corporate charter on takeover activity.

Keywords: takeovers, information, free rider problem

JEL Classification: G34, G14