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- Title
The Allocational Role of Takeover Bids in Situations of Asymmetric Information.
- Authors
GROSSMAN, SANFORD J.; HART, OLIVER D.
- Abstract
It is generally accepted that takeover bids help to bring about an efficient allocation of resources. However, the following argument is often suggested by those who want the government to restrict takeover bids: the acquiring firm may have special information about the target firm's resources which indicates that the target is really worth more than its current market valuation. Hence, the acquiring firm, by paying only a small premium, is able to acquire these resources at a price below the true worth to shareholders indicated by the inside information. Thus shareholders are unable to capture the true benefits of their investments, and an inefficient amount of investment will take place. Therefore the government should restrict takeover bids. The above argument is clearly wrong if there is competition among informed bidders for the target firm's assets. However, proponents of the argument claim that some takeover bids occur exactly because only one agent has special, inside information about the target company's resources. In this paper we show that the argument is false even if there is only one bidder as long as shareholders have rational expectations about the takeover bid process. Though we think it is important to point out the error in the above argument, this paper's main purpose is to study the informational role of takeover bids. In the process of modelling the transmission of information, we provide a theoretical model which explains among other things the empirical result that firms which are subject to an unsuccessful takeover bid are (on average) revalued upwards by the market even after the bid fails.
- Subjects
TENDER offers; INFORMATION asymmetry; RESOURCE allocation; BIDDING strategies; STOCKHOLDERS; PROFIT maximization; ECONOMICS
- Publication
Journal of Finance (Wiley-Blackwell), 1981, Vol 36, Issue 2, p253
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1981.tb00438.x