Why Higher Takeover Premia Protect Minority Shareholders

Abstract

Posttakeover moral hazard by the acquirer and free-riding by the target shareholders lead the former to acquire as few shares as necessary to gain control. As moral hazard is most severe under such low ownership concentration, inefficiencies arise in successful takeovers. Moreover, share supply is shown to be upward-sloping. Rules promoting ownership concentration limit both agency costs and This project was initiated when all three authors were at the Financial Markets Group at the London School of Economics. We have benefited from comments by Erik Berglöf, Elazar Berkovitch, Patrick Bolton, Arnoud Boot, Gilles Chemla, Jan Ericsson, Abby Innes, Ronen Israel, Kjell Nyborg, Marco Pagano, Ailsa Röell, Jean Tirole, Luigi Zingales, the editor, an anonymous referee, and seminar participants in Barcelona (Institut d'Anàlisi Econò mica), Basel, Boston University, Bologna, Chicago, the European winter meeting of the Econometric Society, the 1995 meeting of the European Summer Symposium in Financial Markets in Gerzensee, Harvard, London School of Economics, Madrid (Centro de Estudios Monetarios y Financieros), Milan (Bocconi), Massachusetts Institute of Technology, Naples, Nordic Symposium on Corporate and Institutional Finance in Sandvika 1995, Pavia, and Stockholm (Stockholm School of Economics and Institute for International Economic Studies). Financial support from Universitá Bocconi (grant Struttura della proprietá azionaria, mercato dei capitali e regolamentazione) and Bankforskningsinstitutet (Burkart) is gratefully acknowledged. All remaining errors are our own. [ Journal of Political Economy, 1998, vol. 106, no. 1] © 1998 by The University of Chicago. All rights reserved. 0022-3808/98/0601-0003$02.50 172 higher takeover premia 173 the occurrence of takeovers. Furthermore, higher takeover premia induced by competition translate into higher ownership concentration and are thus beneficial. Finally, one share-one vote and simple majority are generally not optimal, and socially optimal rules need not emerge through private contracting.

Controlling shareholders and corporate value: Evidence from Thailand

“…Burkart et al (1998) and Bebchuk et al (1999) argue that patterns of corporate ownership are critical to the level of private benefits extracted by the controlling shareholders. Ownership and control patterns such as pyramids, cross-ownership ties and dual-class share structures permit controlling shareholders to reduce the cash flow rights associated with voting rights.…”

Signalling to Dispersed Shareholders and Corporate Control

“…This ensures that relinquishing a given fraction of private benefits is more costly for higher-valued types, that is, the single crossing property holds. 13 As we show below, the assumption of Φ(·) non-decreasing is satisfied in well-known variants of the tender offer game.…”

“…Conversely, conditional on symmetric information, she chooses offer terms that maximize her private returns to effort. Any gain in security benefits she brings about is extracted by the free-riding shareholders, as shown by Burkart et al (1998). To limit such extraction, the bidder uses call options to "cap" her exposure to security benefits, thereby diluting post-takeover incentives.…”

“…Conditional on restoring symmetric information, the bidder then maximizes net private benefits rather than the value of her post-takeover block due to the shareholders' free-rider behavior (Burkart et al, 1998). In fact, she can implement the requisite effort level independent of the equity block she acquires through the same derivatives she uses to prevent shareholders from overestimating the post-takeover security benefits.…”

“…Our analysis in Section 5 of a setting that combines asymmetric information, the free-rider problem, and moral hazard is to our knowledge novel, though the interaction between the latter two frictions has been studied in Burkart et al (1998).…”