Advising Shareholders in Takeovers

Abstract:     
This paper studies the advisory role of the target board in takeovers. I show that because target shareholders fail to coordinate their collective decision, in equilibrium, the credibility of the board's recommendation and shareholder value can increase with the bias of the board. Moreover, I show that the threat of revealing information can by itself change the outcome of the takeover, and the highest shareholder value in equilibrium is obtained when the recommendation of the board is uninformative and ignored by shareholders. Last, the option to communicate with shareholders provides a novel rationale against the use of takeover defenses by corporate boards.

Number of Pages in PDF File: 54

Keywords: Coordination, Tender Offer, Takeover, Merger, Advice, Communication, CheapTalk, Free-riding, Externalities

JEL Classification: D74, D82, D83, D62, G34, K22

working papers series