6533b86efe1ef96bd12cc6e4

RESEARCH PRODUCT

Participation Costs and Inefficiency in Takeover Contests

subject

description

We consider a takeover in which risk neutral bidders incur private costs to participate to the auction. Supposing that valuations for target firm are common knowledge, we study the optimal strategy of bidders and analyze the takeover result when they get or not toeholds in the target firm. We found that bidder's decision of participation is endogenous. By analyzing bidder's condition of participation, we found that the probability that the potential bidder with the highest valuation will not participate to the control, exists. We show that this probability increases with the size of toeholds possessed by the bidder with low valuation. Nevertheless, the size of toeholds possessed by the bidder with the highest valuation increases the probability of his participation to the auction. Asymmetric toeholds between potential bidders can accentuate inefficient allocation when participation costs are private information. However, if bidder with toeholds deters completely bidders without toeholds to participate when valuation are private information, the phenomenon of fully deterring is destroyed when valuations are common knowledge.