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RFS Advance Access published online on January 22, 2007
Review of Financial Studies, doi:10.1093/revfin/hhm002
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Optimal Equity Stakes and Corporate Control*

Richmond D. Mathews
Fuqua School of Business, Duke University

rmathews{at}duke.edu

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.


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