DP15249 The Social Value of Debt in the Market for Corporate Control
How should bidders finance tender offers when the objective of the takeover is to improve incentives? In such a setting, debt finance has benefits even when bidders have deep pockets: It amplies incentive gains, imposes Pareto sharing on bidders and free-riding target shareholders, and makes bidding competition more efficient. High leverage, independent of financing needs, can be privately and socially optimal. Although takeover debt dilutes target shareholders, they may benefit most from it, especially when bidding is competitive.