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Rev Fin 1993; 6:851-882
© 1993 the Society for Financial Studies

Article

The dynamics of the free-rider problem in takeovers

JE Harrington, Jr1 and J Prokop2,z
1 The Johns Hopkins University, USA
2 Deapartment of Management and Strategy, Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA
z Corresponding author

Abstract

We explore the dynamics of a takeover bid. In contrast to preceding models, if the initial takeover bid is unsuccessful a raider is allowed to make a new tender offer in order to try and secure the remaining shares. Numerical analysis shows that the raider's tender offer rises over time as be accumulates more shares. The anticipation of a higher tender offer in the future makes shareholders more inclined to hold their shares and forces the raider to offer a higher premium than is predicted by static theories. As the time between tender offers goes to zero, we show analytically that the expected profit from engaging in a takeover goes to zero.


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Home page
 REV FINANC STUDHome page
A. B. Gillette and T. H. Noe
If at First You Don't Succeed: The Effect of the Option to Resolicit on Corporate Takeovers
Rev. Financ. Stud., June 1, 2006; 19(2): 561 - 603.
[Abstract] [Full Text] [PDF]


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