Initial Shareholdings and Overbidding in Takeover Contests



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    • Financial Markets Group, London School of Economics, and Department of Finance, Stockholm School of Economics. An earlier version of this paper appeared as LSE Financial Markets Group Discussion Paper No. 180 under the title “Overbidding in Takeover Contests.” I would like to thank Margaret Bray, Maria De Liseo, Jan Ericsson, Julian Franks, Ron Giammarino, Denis Gromb, Oliver Hart, Martin Hellwig, Alison Hole, Godfrey Keller, Reinout Koopmans, Thomas Piketty, Ailsa Röell, Bengt Rosén, Kristian Rydqvist, René Stulz (the editor), Jean Tirole, anonymous referees as well as seminar participants at the Econometric Society European Meeting (Uppsala 93), the Eighth Annual Congress of the European Economic Association (Helsinki 93), and the Department of Finance at the Stockholm School of Economics, for their helpful comments and suggestions. All remaining errors are mine. Part of this paper was written while I was visiting the Department of Finance at the Stockholm School of Economics. Financial support from the Financial Markets Group (LSE), the Swiss National Science Foundation, Max-Geldner Stiftung, Nikolaus und Bertha Burckhardt-Bürgin Stiftung and Bankforskningsinstitutet is gratefully acknowledged.


Within the context of takeovers, this paper shows that in private-value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e., to bid more than his valuation. This strategy, however, can lead to i) an inefficient outcome, and ii) the winning bidder making a net loss. Further, the overbidding result implies that the presence of a large shareholder increases the bid premium in single-bidder takeovers at the expense of reducing the probability of the takeover actually occurring.