Facilitation of Competing Bids and the Price of a Takeover Target
Ivan P. L. Png
National University of Singapore
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
Review of Financial Studies, Vol. 2, No. 4, pp. 587-606, 1989
We present a model of corporate acquisitions in which initially uninformed bidders must incur costs to learn their (independent) valuations of a potential takeover target. The first bidder makes either a preemptive bid that will deter the second bidder from investigating or a lower bid that will induce the second bidder to investigate and possibly compete. We show that the expected price of the target may be higher when the first bidder makes a deterring bid than when there is competitive bidding. Hence, by weakening the first bidder's incentive to choose a preemptive bid, regulatory and management policies to assist competing bidders may reduce both the expected takeover price and social welfare.
Accepted Paper Series
Date posted: December 1, 2008
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