How Costly to Sell a Company? A Structural Analysis of Takeover Auctions

45 Pages Posted: 8 Jan 2020

See all articles by Dong-Hyuk Kim

Dong-Hyuk Kim

School of Economics, University of Queensland

Ying Zheng

School of Applied Economics, Renmin University of China

Date Written: December 17, 2019

Abstract

To explain why sellers in takeover auctions limit bidders entry, we structurally measure economic costs incurred by the seller for inviting an additional bidder. Our auction model allows bidders to discount their synergy values when rivals obtain the target companys confidential information, which induces the information cost. We identify the model primitives with unobserved heterogeneity, as confidential information is latent. From a sample of U.S. M&As, we find that the unobserved heterogeneity is critical, bidders lower values by 11.9% for each rival, and the information (operation) cost amounts to 1.3% (4.1%) of the equilibrium deal value for a representative target.

Keywords: Mergers and Acquisitions, Takeover Auctions, Structural Identification and Estimation, Information Cost, Operation Cost

JEL Classification: C57, D22, D44, G34

Suggested Citation

Kim, Dong-Hyuk and Zheng, Ying, How Costly to Sell a Company? A Structural Analysis of Takeover Auctions (December 17, 2019). Available at SSRN: https://ssrn.com/abstract=3505106 or http://dx.doi.org/10.2139/ssrn.3505106

Dong-Hyuk Kim

School of Economics, University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Ying Zheng (Contact Author)

School of Applied Economics, Renmin University of China ( email )

Beijing
China

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