Leaks and Takeovers
51 Pages Posted: 16 Jan 2020 Last revised: 28 Apr 2020
Date Written: December 29, 2019
I present a cheap talk model of information leaks in takeovers. Takeover targets strategically leak information about the value of synergies to attract an additional bidder. Targets with high synergies leak exaggerated information, cause a runup, and are sold in an auction. Targets with low synergies do not leak and are sold to a single acquirer. Traditional takeover defenses backfire, by increasing the likelihood that the target is sold to a single acquirer, while toeholds increase the acquirer's revenue by discouraging leaks. Enforcement of insider trading reduces the likelihood of leaks, reduces runups, and increases efficiency in the takeover market.
Keywords: Cheap Talk, Takeovers, Runups, Auctions, Negotiations
JEL Classification: G34, G38, D82
Suggested Citation: Suggested Citation