The Dynamics of the Free-Rider Problem in Takeovers

Contracting with Externalities

“…Unlike with bilateral contracting, the number of 23. In the context of takeovers with a superior raider, a similar observation has been made by Harrington and Prokop [1993], who study multiperiod bidding by a raider. Their numerical simulations show that the raider's inability to commit to a bid increases the likelihood of takeover and expected total surplus.…”

“…For example, a raider who acquires 49 percent of the firm might be able and willing to implement most of the value improvements that could be implemented by owning 51 percent of the firm. Even if these improvements are blocked by other shareholders, the raider's large toehold makes it likely that she will gain full control in the future, anticipation of which drives up the firm's market value [Shleifer and Vishny 1986;Harrington and Prokop 1993]. Therefore, there are reasons to expect the firm's value v(X ) to be continuous in the raider's acquired stake X, in which case Proposition 11 allows us to treat small shareholders as nonpivotal, provided that the raider uses asymptotically continuous mechanisms.…”

Competing for Loyalty: The Dynamics of Rallying Support

“…In the benchmark model we saw that whenever the principals added value, competition was detrimental to followers' welfare. But while transfers from the principals to the agents were always negative with public goods, in the generalized environment public goods can coexist with 12 This result is similar to that of Harrington and Prokop (1993), who consider a dynamic version of GH in which the raider can reproach the shareholders who have not sold (taking all offers at the posted price in each period). This setup leads to a "Coase conjecture" result, in which the raider's profit is diluted for large discount factors.…”

Information in Tender Offers With a Large Shareholder

“…Hence, the raider has to offer at least the expectation of the post-takeover value of the shares to succeed, rendering successful takeovers unprofitable. In the face of even a small cost, the raider will not initiate a value-increasing takeover, making the free-riding problem a fundamental source of inefficiency in the market for corporate control (see Grossman and Hart (1980), Bagnoli and Lipman (1988), and Harrington and Prokop (1993)).…”