References (38)



Toehold Acquisitions, Market Reaction, and Corporate Control

Jun Qian

Boston College - Finance Department; University of Pennsylvania - Wharton Financial Institutions Center; China Academy of Financial Research (CAFR)

April 2001

This paper presents a takeover model with symmetric information regarding post-tender offer target values, and provides a solution to the empirical puzzle of zero or small toeholds acquired before tender offers. With endogenous market adjustment of pre-tender offer target price, we show that a risk-averse bidder forgoes an aggressive toehold strategy in order to minimize losses following failed takeovers due to target defense, and that a toehold does not solve the free-rider problem of target shareholders.

When there is perfect information regarding the possible post-takeover target values, and that the profits and losses from toehold offset each other, then the optimal toehold is zero. But if acquiring a toehold benefits the risk-averse bidder beyond the payoffs from the takeover, for instance, to serve the bidder's portfolio risk reduction motive, or to generate profits from selling to rival bidders in a control contest, then a positive toehold is part of the equilibrium. We also study how the optimal toehold varies in both diversifying and related acquisitions, and how the presence of rival bidders affects the initial bidder's toehold strategies.

Number of Pages in PDF File: 37

Keywords: Toehold, takeover, tender offer, risk-aversion

JEL Classification: G34, D8, K22

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Date posted: May 25, 2001  

Suggested Citation

Qian, Jun, Toehold Acquisitions, Market Reaction, and Corporate Control (April 2001). Available at SSRN: http://ssrn.com/abstract=270098 or http://dx.doi.org/10.2139/ssrn.270098

Contact Information

Jun Qian (Contact Author)
Boston College - Finance Department ( email )
Wallace E. Carroll School of Management
330 Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-3145 (Phone)
617-552-0431 (Fax)
HOME PAGE: http://www2.bc.edu/~qianju
University of Pennsylvania - Wharton Financial Institutions Center
2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States
HOME PAGE: http://fic.wharton.upenn.edu/fic/
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030

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References:  38

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