If at First You Don't Succeed: An Investigation of the Effect of the Option to Resolicit on Corporate Takeovers and the Provision of Public Goods

Abstract

This paper models, and experimentally simulates, the free-rider problem in a takeover when the raider has the option to "resolicit," that is, to make a new offer after an offer has been rejected. In theory, the option to resolicit, by lowering offer credibility, increases the dissipative losses associated with free riding. In practice, the outcomes of our experiment support the overall predictions of theory. Although in resolicitation treatments, raider offers generally exceeded equilibrium predictions, shareholder tendering probabilities were less than predicted by either actual or equilibrium offers. The net effect of higher-than-predicted raider offers and lower-than-predicted shareholder tendering was negative. Thus, as predicted by theory, the option to resolicit increased the total dissipative costs associated with free riding, and reduced raider gains to less than three percent of synergy value.

Key words: corporate takeovers, experimental economics, resolicit

JEL Classification: G3, C7