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Takeover Contests, Toeholds and Deterrence

David Ettinger ()

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Abstract: We consider a setting in which two potential buyers, one with a prior toehold and one without, compete in a takeover modeled as an ascending auction with participating costs. The toeholder is more aggressive during the takeover process because she is also a seller of her own shares. The non-toeholder anticipates this extra-aggressiveness of the toeholder. Thus, he is deterred from participating unless he has a high valuation for the target company. This leads to large inefficiency losses. For many configurations, expected target returns are first increasing then decreasing in the size of the toehold.

Keywords: Takeovers; ascending auctions; toeholds; deterrence (search for similar items in EconPapers)
Date: 2009
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Published in Scandinavian Journal of Economics, Wiley, 2009, 111 (1), pp.103-124

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