Signaling in Tender Offer Games
FMG Discussion Paper No. 655
Posted: 13 Feb 2009 Last revised: 9 Oct 2013
Date Written: December 31, 2012
This paper examines how the interaction of bidder's private information and target shareholders' free-riding behavior affects the equilibrium outcomes and bid design in tender offers. While pooling equilibria always exist, separating ones emerge only in two scenarios. First, the bidder can reveal her type if she can commit to extract private benefits in a manner that is informative about the post-takeover security benefits. We discuss which exclusion mechanisms in practice satisfy these requirements. Second, allowing the bidder to use securities other than equity to unbundle cash flow and voting rights overcomes all frictions. Offers that include derivatives allow for perfect revelation and implement the symmetric information outcome.
Keywords: Signaling, Free-Rider Problem, Means of Payment, Restricted Bids, Two-dimensional Types
JEL Classification: G32
Suggested Citation: Suggested Citation