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The theory of corporate takeover bids: A subgame perfect approach

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  • Suresh Deman

Abstract

In this paper I re-examine Grossman & Hart's (1980a) earlier work on corporate takeovers and address three main shortcomings of their theory. First, their theory implies that in the ‘Nash equilibrium’ either all shareholders will decide to tender their shares or all will refuse the raider's tender offer. Hence, they look only at the pure strategy equilibria. Second, there does not exist any free‐rider problem in the extreme cases of pure strategy equilbria because everyone sells his or her share and the raider does not have to deal with any minority shareholder in the equilibrium. On the other hand, if the raid fails and no one sells, then there is no question of dilution either. I show some mixed‐strategy equilibria using assumptions of Grossman and Hart. Third, Grossman and Hart claim that their theory rules out the possibilities of takeovers by the inefficient raider in which the shareholders who tender their shares are worse off than they would have been otherwise with the incumbent management. It appears from the model that their argument is based on rather arbitrary assumptions.

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  • Suresh Deman, 1994. "The theory of corporate takeover bids: A subgame perfect approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 383-397, July/Augu.
    • Handle: RePEc:wly:mgtdec:v:15:y:1994:i:4:p:383-397
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    File URL: http://hdl.handle.net/10.1002/mde.4090150411
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    Cited by:

    1. S. Deman, 1999. "Modelling Building Societies Takeovers a Non-Cooperative Game," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 3(3), pages 203-229, September.
    2. Ann B. Gillette & Thomas H. Noe, 2000. "If at first you don't succeed: an experimental investigation of the impact of repetition options on corporate takeovers," FRB Atlanta Working Paper 2000-9, Federal Reserve Bank of Atlanta.

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