Initial Shareholdings and Overbidding in Takeover Contests
JOURNAL OF FINANCE, Vol. 50 No. 5, December 1995
Posted: 22 Aug 1998
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: Suggested Citation