Ownership Structure, Potential Competition, and the Free-Rider Problem on Tender Offers
Journal of Law, Economics & Organization: Volume 10 Number 1, April 1994
Posted: 16 May 1998
Bagnoli and Lipman (1988) have shown that ownership structure is a significant determinant of the division of the gains in tender offers. This article extends their model to allow for potential competition and for the bidder to acquire a toehold. We show that for some optimal bids the number of shares expected to be tendered is less than the number required for control. Moreover, announcement day returns are predicted to vary cross-sectionally as they reflect both the degree to which the bid is anticipated and the bargaining power of the target's shareholders. We show that "free-rider" type results in which the target's shareholders capture all of the gains are due to extreme modeling assumptions.
JEL Classification: G32
Suggested Citation: Suggested Citation