Ownership Structure, Potential Competition, and the Free-Rider Problem in Tender Offers

Michael F Ferguson

The Journal of Law, Economics, and Organization, 1994, vol. 10, issue 1, 35-62

Abstract: Bagnoli and Lipman (1988) have shown that ownership structure is a significant determinant of the division of the gains in tender offers. This article extends their model to allow for potential competition and for the bidder to acquire a toehold. We show that for some optimal bids, the number of shares expected to be tendered is "less" than the number required for control. Moreover, announcement day returns are predicted to vary cross-sectionally as they reflect both the degree to which the bid is anticipated and the bargaining power of the target's shareholders. We show that "free-rider" type results in which the target's shareholders capture all of the gains are due to extreme modeling assumptions. Copyright 1994 by Oxford University Press.

Date: 1994
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