Initial Shareholdings and Overbidding in Takeover Contests

JOURNAL OF FINANCE, Vol. 50 No. 5, December 1995

Posted: 22 Aug 1998

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Abstract

Within the context of takeovers, this paper shows that in private-value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e. to bid more than his valuation. This strategy, however, can lead to i) an inefficient outcome, and ii) the winning bidder making a net loss. Further, the overbidding result implies that the presence of a large shareholder increases the bid premium in single-bidder takeovers at the expense of reducing the probability of the takeover actually occurring.

JEL Classification: G34

Suggested Citation

Burkart, Mike C., Initial Shareholdings and Overbidding in Takeover Contests. JOURNAL OF FINANCE, Vol. 50 No. 5, December 1995. Available at SSRN: https://ssrn.com/abstract=6907

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

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111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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