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.