Signaling in Tender Offer Games
Stockholm School of Economics - Department of Finance; London School of Economics - Department of Finance & Financial Markets Group; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
New York University (NYU) - Leonard N. Stern School of Business; European Corporate Governance Institute (ECGI)
EFA 2009 Bergen Meetings Paper
FMG Discussion Paper No. 655
We examine whether a bidder can use tender offer terms to signal post-takeover security benefits. Neither restricted bids nor cash-equity offers allow the bidder to reveal private information. Since atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models: The bidder must enjoy gains from trade that are excluded from bargaining (private benefits) but can nonetheless be relinquished. Dilution, debt financing, and toeholds are viable signaling devices because they imply private benefits that depend on security benefits in a predictable manner. In these signaling equilibria, lower-valued types must forgo a larger fraction of their private gains, and these costs can prevent some takeovers. Strikingly, the separation of cash flow and voting rights overcomes the asymmetric information problem. Offers that include derivatives allow for a complete separation and can therefore implement the symmetric information outcome.
Number of Pages in PDF File: 44
Keywords: Signaling, Free-Rider Problem, Means of Payment, Restricted Bids, Two-dimensional Types
JEL Classification: G32working papers series
Date posted: February 13, 2009 ; Last revised: July 6, 2010
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