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Rev Fin 1989; 2:587-606
© 1989 the Society for Financial Studies

Article

Facilitation of competing bids and the price of a takeover target

D Hirshleifer and IPL Png
John E. Anderson Graduate School of Management, University of California, 405 Hilgard Avenue, Los Angeles, CA 90024-1481, USA

Abstract

We present a model of corporate acquisitions in which initially uninformed bidders must incur costs to learn their (independent) valuations of a potential takeover target. The first bidder makes either a preemptive bid that will deter the second bidder from investigating or a lower bid that will induce the second bidder to investigate and possible compete. We show that the expected price of the target may be higher when the first bidder makes a deterring bid than when there is competitive bidding. Hence, by weakening the first bidder's incentive to choose a preemptive bid, regulatory and management policies to assist competing bidders may reduce both the expected takeover price and social welfare.


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Home page
 REV FINANC STUDHome page
M. M. Bange and M. A. Mazzeo
Board Composition, Board Effectiveness, and the Observed Form of Takeover Bids
Rev. Financ. Stud., October 1, 2004; 17(4): 1185 - 1215.
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