DP15249 The Social Value of Debt in the Market for Corporate Control

Author(s):	Mike Burkart, Samuel Lee, Henrik Petri
Publication Date:	September 2020
Keyword(s):	Debt Financing, Debt overhang, Equity Dilution, free-riding, tender offers
JEL(s):	G34
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15249

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.