The Toehold Puzzle

52 Pages Posted: 12 Oct 2005

See all articles by Sandra Betton

Sandra Betton

Concordia University, Quebec - Department of Finance

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Date Written: May 2005

Abstract

Although takeover premiums are large, only 2% of twelve thousand bidders initiating control contests for publicly traded targets acquire target shares (toehold) shortly prior to the bid. We argue that, because toeholds deter competition, toehold bidding may trigger target resistance. If resistance simply means withholding a termination agreement, it takes a toehold of 8% to compensate for the opportunity loss of a typical agreement. As predicted, we find that toehold bidding is significantly more likely when this implied toehold threshold is low. Toehold costs may also arise when target resistance eliminates all bids. We show, however, that the expected marginal toehold effect is positive because toeholds increase the probability of success. Finally, toehold purchases may cause a pre-bid target stock price run-up and increase total takeover costs (markup pricing). However, we find that bidder gains are increasing in both the target run-up and in the toehold. We conclude that friendly bidders appear to abstain from toeholds primarily to avoid toehold-induced target resistance.

Suggested Citation

Betton, Sandra and Thorburn, Karin S. and Eckbo, B. Espen, The Toehold Puzzle (May 2005). CEPR Discussion Paper No. 5084. Available at SSRN: https://ssrn.com/abstract=776704

Sandra Betton

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada
514-848-2783 (Phone)
514-848-4500 (Fax)

Karin S. Thorburn (Contact Author)

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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

B. Espen Eckbo

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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