Takeover Bidding with Toeholds: The Case of the Owner's Curse

Rajdeep Singh ()

Finance from University Library of Munich, Germany

Abstract: This paper demonstrates that winning a takeover bidding contest can be `bad news' and, consequently, losing can be `good news.' This is true even when all bidders act rationally in their own best interests with perfect information on their valuations. Bidders with toeholds rationally bid above their valuations and possibly suffer losses in equilibrium. This equilibrium strategy of `bidding to lose' played by partial owners leads to the `owner's curse.' The paper provides an explanation for acquirer losses without recourse to managerial `hubris' and/or agency problems. The presence of partial owners also has strong implications for the choice of selling mechanisms: firms should not be sold using a first price sealed-bid auction. The presence of large blockholders also acts as a costless defensive measure and partially substitutes for other costly defensive measures. The model gives rise to predictions on (1) the type of acquirers more likely to make losses; (2) the choice of auction procedures; (3) the effect of managerial ownership on firm value; (4) the existence of initial bid premia; and (5) the incentives of firms to engage in share repurchase, private placement and debt-for-equity swaps in the face of a takeover threat.

JEL-codes: G (search for similar items in EconPapers)
Pages: 36 pages
Date: 1995-03-09
Note: 36 pages, postscript file and the compressed postscript file.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Takeover Bidding with Toeholds: The Case of the Owner's Curse (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9503001

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