Abstract

http://ssrn.com/abstract=768744
 
 

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Optimal Toeholds in Takeover Contests


Eitan Goldman


Indiana University - Kelley School of Business - Department of Finance

Jun Qian


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


Journal of Financial Economics, Vol. 77, No. 2, pp. 321-346, August 2005

Abstract:     
We offer an explanation for why raiders do not acquire the maximum possible toehold prior to announcing a takeover bid. By endogenously modeling the target firm's value following an unsuccessful takeover we demonstrate that a raider may optimally acquire a small toehold even if the acquisition does not drive up the pre-tender target price. This occurs because although a larger toehold increases profits if the takeover succeeds it also conveys a higher level of managerial entrenchment and hence a lower firm value if the takeover fails. We derive new predictions regarding the optimal toehold and target value following a failed takeover. We also examine the impact of a rival bidder and dilution.

Keywords: Toehold, entrenchment, free-rider problem, takeover, tender offer

JEL Classification: G34, D8, K22

Accepted Paper Series


Not Available For Download

Date posted: August 2, 2005  

Suggested Citation

Goldman, Eitan and Qian, Jun, Optimal Toeholds in Takeover Contests. Journal of Financial Economics, Vol. 77, No. 2, pp. 321-346, August 2005. Available at SSRN: http://ssrn.com/abstract=768744

Contact Information

Eitan Goldman
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

Jun Qian (Contact Author)
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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/
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