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Signalling to dispersed shareholders and corporate control

Mike Burkart () and Samuel Lee

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This article analyses how outsiders, such as bidders or activist investors, overcome the lack of coordination and information among dispersed shareholders. We identify the two basic means to achieve this goal. First, the outsider must relinquish private benefits in a manner that is informative about security benefits. We show under which conditions this is feasible and which acquisition strategies used in practice meet these conditions. Second, the outsider can alternatively use derivatives to drive a wedge between her voting power and her economic interest in the firm. Such unbundling of ownership and control, while typically considered a source of corporate governance problems, is an efficient response to the frictions dispersed ownership causes for control contestability. We also show that unbundling comes with costs and benefits for the bidder's incentives to improve firm value.

Keywords: Tender offers; Investor activism; Signalling; Free-rider problem; Means of payment; Unbundling; Ownership and control; Empty voting (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2015-01-22
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Published in Review of Economic Studies, 22, January, 2015, 82(3), pp. 922-962. ISSN: 0034-6527

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http://eprints.lse.ac.uk/69538/ Open access version. (application/pdf)

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