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Discussion Paper Details

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Title: Signaling in Tender Offer Games

Author(s): Mike Burkart and Samuel Lee

Publication Date: August 2010

Keyword(s): Free-Rider Problem, Means of Payment, Restricted Bids, Signaling and Two-dimensional Types

Programme Area(s): Financial Economics

Abstract: We examine whether a bidder can use tender offer terms to signal post-takeover security benefits. Neither restricted bids nor cash-equity offers allow the bidder to reveal private information. Since atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models: The bidder must enjoy gains from trade that are excluded from bargaining (private benefits) but can nonetheless be relinquished. Dilution, debt financing, and toeholds are viable signaling devices because they imply private benefits that depend on security benefits in a predictable manner. In these signaling equilibria, lower-valued types must forgo a larger fraction of their private gains, and these costs can prevent some takeovers. Strikingly, the separation of cash flow and voting rights overcomes the asymmetric information problem. Offers that include derivatives allow for a complete separation and can therefore implement the symmetric information outcome.

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Bibliographic Reference

Burkart, M and Lee, S. 2010. 'Signaling in Tender Offer Games'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7938