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Optimal Equity Stakes and Corporate Control

39 Pages Posted: 5 Jan 2005  

Richmond D. Mathews

University of Maryland - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 13, 2004

Abstract

I show that firms may optimally place their own equity with other firms in anticipation of possible future corporate control activity. In the model, a target and potential acquirer can negotiate before synergy values are learned. I find that equity implements an optimal mechanism, benefiting both firms at the expense of another potential bidder. The stake is limited by the outsider's willingness to investigate the target. The results imply that corporate control may motivate an equity sale even when no takeover activity is apparent at the time or occurs ex-post. I derive results on optimal stake sizes and block pricing.

Keywords: equity stakes, corporate control, takeovers, auctions, mechanism design, optimal contracting

JEL Classification: D44, G32, G34

Suggested Citation

Mathews, Richmond D., Optimal Equity Stakes and Corporate Control (September 13, 2004). AFA 2005 Philadelphia Meetings Paper. Available at SSRN: https://ssrn.com/abstract=644028 or http://dx.doi.org/10.2139/ssrn.644028

Richmond D. Mathews (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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