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A model of the entry decision of potenial raiders into the bidding for a target firm
Abdallah, Hanin I.
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This work is in the spirit of the literature on the understanding and analysis of the different forces that shape the takeover process. We focus on the strategic interaction among the raiders and we study their decision to enter the bidding for a target form in a context of asymmetric information. Each raider incurs a fixed takeover sunk. cost when she decides to enter the bidding. Therefore she wants to avoid bidding for the firm and losing the bid to a raider with a higher valuation. We analyze the Bayesian-Nash equilibrium in one-period, two-period and infinite period models where each raider decides whether and in which period to enter. This decision depends on the takeover cost, the target's reservation price and the distribution function of the raiders' valuations. We also consider the case where one of the raiders is a large shareholder and the role of management in maximizing the shareholders' interests. We find that raiders delay entry into the bidding when the takeover cost or the reservation price for the firm increase. Such an increase also implies a decrease in the probability of a takeover. If one of the raiders is a large shareholder, he will enter the bidding faster the bigger is the percentage of shares he owns in the target. The existence of a large shareholder will, however, discourage other raiders from entering. The shareholders of the target firm might benefit from an increase in the target's reservation price but they never profit from an increase in the takeover cost. We conclude with an empirical section that indirectly tests some of our model's implications. The results of our empirical work indicate that raiders enter the bidding faster when the management's reaction to the bid proves to be friendly. The premiums offered by the raiders and the size of the target test insignificant in determining the pre-bidding period. Finally we find that the existence of a large shareholder discourages other raiders from entry. However, the large shareholder has on average a longer pre-bidding waiting period than a raider with no ownership in the firm.
- Doctoral Dissertations