Legal Investor Protection and Takeovers

57 Pages Posted: 30 May 2011 Last revised: 19 Feb 2013

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Denis Gromb

HEC Paris

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Fausto Panunzi

Bocconi University - Department of Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 5 versions of this paper

Date Written: February 15, 2013

Abstract

Does legal investor protection improve efficiency in the market for corporate control? To address this question, we incorporate financing constraints and legal investor protection into a standard takeover model. In the model, stronger legal investor protection increases a bidder’s outside funding capacity. However, absent effective bidding competition, this does not improve efficiency, as the bid price – and thus the bidder’s need for funds – increases in lockstep with his pledgeable income. In contrast, under effective bidding competition, the increased outside funding capacity improves efficiency by making it less likely that more efficient but less wealthy bidders are outbid by less efficient but wealthier rivals. Our model provides a novel rationale for the optimality of “one hare-one vote,” shows that margin requirements impair takeover efficiency while shadow costs of internal funds improve it, and makes empirical predictions relating the takeover outcome to, e.g., asset tangibility, financing frictions, firm-level governance, block ownership, cross-border M&A, and the security-voting structure.

Keywords: legal investor protection, takeover, takeover outcome, corporate control

Suggested Citation

Burkart, Mike C. and Gromb, Denis and Mueller, Holger M. and Panunzi, Fausto, Legal Investor Protection and Takeovers (February 15, 2013). INSEAD Working Paper No. 2013/30/FIN. Available at SSRN: https://ssrn.com/abstract=1854367 or http://dx.doi.org/10.2139/ssrn.1854367

Mike C. Burkart

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

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United Kingdom

Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Denis Gromb (Contact Author)

HEC Paris

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France

Holger M. Mueller

New York University (NYU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

Fausto Panunzi

Bocconi University - Department of Economics ( email )

Via Roentgen 1
20136 Milan
Italy
+39 02 5836 5327 (Phone)
+39 02 5836 5343 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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