A Theory of Takeover Bidding
Rodney L. White Center for Financial Research Working Paper No. 03-00
Posted: 11 Sep 2000
In this paper, we present a model of takeover bidding. Grossman and Hart (1980a) argue that small shareholders in a diffusely held firm would hold on to their shares rather than tendering and earn the higher post takeover return. This "free rider" problem precludes profitable takeovers from ever occurring. However, this problem does not exist in our model. In equilibrium every type of the raider successfully hides her private information in the offer stage, thus earning positive profits. We also show that the higher the fraction of the shares the incumbent initially holds, the higher the equilibrium tender offer price. Contrary to Grossman and Hart (1980b), voluntary full disclosure of private information may not be the outcome even when misrepresenting is not feasible. Moreover, enforcement of disclosure laws may lead to a sub-optimal outcome. Finally, we discuss the design of the optimal corporate charter and show that the optimal choice of the supermajority rule depends on the incumbent's initial holdings.
JEL Classification: G34
Suggested Citation: Suggested Citation