The European Equal Opportunity Rule in Transfer of Control: A Signaling Model
40 Pages Posted: 29 Jan 2008 Last revised: 19 Jun 2015
Date Written: January 29, 2008
Abstract
Introduced in the European Union, the equal opportunity rule is seen as protecting investors in the event of a transfer of control. This rule is analyzed in a setting of information asymmetry and future private benefits between the new controlling shareholders and the outside investors. Both parties need to design a new implicit contract to share the firm’s ownership. Using a signaling model, we show that the new controlling shareholder issues signals to outside shareholders to deliver private information on the firm’s future economic return and his private rate of appropriation. Ownership stake of the controlling shareholder and the premium embedded in the acquisition price are key parameters. In a controlling ownership system, the equal opportunity rule modifies the relative behaviors of controlling and outside shareholders. The quality of information deteriorates despite the fact that the discipline may be stronger.
Keywords: Equal opportunity rule, transfer of control, takeover, controlling shareholder, investor protection, signaling equilibrium, private benefits
JEL Classification: G3, G34, G38, K2
Suggested Citation: Suggested Citation
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