Signaling in Tender Offer Games
Swedish House of Finance; Stockholm School of Economics - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); London School of Economics - Financial Markets (FMG) Group
New York University (NYU) - Leonard N. Stern School of Business; Stanford Institute for Economic Policy Research (SIEPR); European Corporate Governance Institute (ECGI)
December 31, 2012
EFA 2009 Bergen Meetings Paper
FMG Discussion Paper No. 655
This paper examines how the interaction of bidder's private information and target shareholders' free-riding behavior affects the equilibrium outcomes and bid design in tender offers. While pooling equilibria always exist, separating ones emerge only in two scenarios. First, the bidder can reveal her type if she can commit to extract private benefits in a manner that is informative about the post-takeover security benefits. We discuss which exclusion mechanisms in practice satisfy these requirements. Second, allowing the bidder to use securities other than equity to unbundle cash flow and voting rights overcomes all frictions. Offers that include derivatives allow for perfect revelation and implement the symmetric information outcome.
Keywords: Signaling, Free-Rider Problem, Means of Payment, Restricted Bids, Two-dimensional Types
JEL Classification: G32
Date posted: February 13, 2009 ; Last revised: October 9, 2013
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