DP6241 Security-Voting Structure and Bidder Screening

Author(s): Christian At, Mike Burkart, Samuel Lee
Publication Date: March 2007
Keyword(s): dual-class share structure, free-rider behaviour, tender offer
JEL(s): G34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6241

This paper analyzes how non-voting shares affect the takeover outcome in a single-bidder model with asymmetric information and private benefit extraction. In equilibrium, the target firm's security-voting structure influences the bidder's participation constraint and in response the shareholders' conditional expectations about the post-takeover share value. Therefore, the structure can be chosen to discriminate among bidder types. Typically, the socially optimal structure deviates from one share - one vote to promote all and only value-increasing bids. As target shareholders ignore takeover costs, they prefer more takeovers and hence choose a smaller fraction of voting shares than is socially optimal. In either case, the optimal fraction of voting shares decreases with the quality of shareholder protection and increases with the incumbent manager's ability. Finally, shareholder returns are higher when a given takeover probability is implemented by (more) non-voting shares rather than by (larger) private benefits.