Anderson Graduate School of Management at UCLA and School of Business Administration, University of Southern California respectively. We thank Michael Brennan, Sudipto Dasgupta, Julian Franks, David Hirshleifer, Steve Lippman, Sheridan Titman, the seminar participants at UCLA, USC, Vanderbilt University, WFA meetings in Jackson Hole, Wyoming in 1991, ORSA/TIMS meetings in Anaheim, California in 1991, the editor (René Stulz) and an anonymous referee for helpful suggestions.
The Strategic Role of Debt in Takeover Contests
Article first published online: 30 APR 2012
1993 The American Finance Association
The Journal of Finance
Volume 48, Issue 2, pages 731–746, June 1993
How to Cite
CHOWDHRY, B. and NANDA, V. (1993), The Strategic Role of Debt in Takeover Contests. The Journal of Finance, 48: 731–746. doi: 10.1111/j.1540-6261.1993.tb04736.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In a takeover contest, the presence of bidders' existing debtholders, if they can be expropriated by issuing new debt with equal or senior priority, allows bidders to commit to bid more than their valuation of the target. Such commitment can be beneficial because it deters potential entry by subsequent bidders and may allow a first bidder to acquire the target at a bargain price. The cost is that if entry by subsequent bidders does nevertheless take place, because the first bidder has committed himself to bid high premia, a bidding war ensues resulting in offers that may involve excessive premia, i.e., bids that are larger than the bidders' valuation of the target.