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Discussion Paper Details

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Title: The Social Value of Debt in the Market for Corporate Control

Author(s): Mike Burkart, Samuel Lee and Henrik Petri

Publication Date: September 2020

Keyword(s): Debt Financing, Debt overhang, Equity Dilution, free-riding and tender offers

Programme Area(s): Financial Economics

Abstract: How should bidders finance tender offers when the objective of the takeover is to improve incentives? In such a setting, debt finance has benefits even when bidders have deep pockets: It amplies incentive gains, imposes Pareto sharing on bidders and free-riding target shareholders, and makes bidding competition more efficient. High leverage, independent of financing needs, can be privately and socially optimal. Although takeover debt dilutes target shareholders, they may benefit most from it, especially when bidding is competitive.

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Bibliographic Reference

Burkart, M, Lee, S and Petri, H. 2020. 'The Social Value of Debt in the Market for Corporate Control'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15249