RFS Advance Access originally published online on January 22, 2007
Review of Financial Studies 2007 20(4):1059-1086; doi:10.1093/revfin/hhm002
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Optimal Equity Stakes and Corporate Control
Fuqua School of Business, Duke University
Address correspondence to Richmond D. Mathews, Fuqua School of Business, Duke University, Box 90120, Durham, NC, 27708, or telephone (919) 660-8026, or e-mail: rmathews{at}duke.edu
JEL: D44, G32, G34
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Abstract |
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I show that firms may optimally sell blocks of their own equity to other firms in anticipation of future corporate control activity. In the model, a target and one potential acquirer, who may also be an alliance partner, can negotiate before synergy values are learned. I find that equity implements an optimal mechanism, allowing the partners to extract surplus from outside bidders who may arrive later. The stake is limited by the outsiders' willingness to investigate. The results imply that corporate control may motivate an equity sale even when no takeover activity is apparent at the time or occurs ex post.
This article is a modified version of Chapter I of my Ph.D. dissertation at the University of Rochester. I am extremely grateful for the advice and support of my dissertation committee, Mike Barclay, Erwan Morellec, and Bill Schwert. I also thank Mike Fishman, Ty Harris, Ludger Hentschel, Tracy Lewis, John Long, Pino Lopomo, Leslie Marx, David Robinson, Dan Rogers, Cliff Smith, Lance Young, seminar participants at Duke, Tulane, and the University of Texas (Austin), as well as Bob McDonald (the editor) and an anonymous referee for helpful comments and discussions. All remaining errors are mine.