Tender Offers and Leverage

Fausto Panunzi and Holger Mueller

No 3964, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine whether, and why, it matters how tender offers for widely held firms are financed. If tender offers are financed with debt, the positive effect of a synergy gain or value improvement on the combined firm?s equity is partly offset by the simultaneous increase in debt. Dispersed target shareholders then only appropriate part of the value improvement, which mitigates the free-rider problem. Bankruptcy costs, incentive problems on the part of the raider, and defensive leveraged recapitalizations and asset sales by the target management are all counter-forces to high bidder leverage, thereby shifting takeover gains to target shareholders and causing takeovers to fail. While bankruptcy costs are a social cost, the takeover premium is merely a wealth transfer between the raider and target shareholders. As the raider does not internalize this, they use too much debt relative to the social optimum.

Keywords: Tender offers; Leverage; Free-rider problem (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2003-07
New Economics Papers: this item is included in nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP3964 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3964

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3964

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().