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Just Enough or All: Selling a Firm

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  • Mehmet Ekmekci
  • Nenad Kos
  • Rakesh Vohra

Abstract

We consider the problem of selling a firm to a single buyer. The magnitude of the post-sale cash flow rights (v) as well as the benefits of control (b) are the buyer’s private information. In contrast to research that assumes the private information of the buyer is one-dimensional, the optimal mechanism is a menu of tuples of cashequity mixtures. We provide sufficient conditions on the joint distribution of v and b such that the optimal mechanism takes one of the following forms: i) a take-it or leave-it offer for the smallest fraction of the company that facilitates the transfer of control, or ii) a take-it or leave-it offer for all the shares of the company. We also identify a sufficient condition for the seller to extract the full value, v, per share so that the buyer earns information rents only on the private benefits of control. JEL Code: D82, D86. Keywords: Multidimensional mechanism design, negotiated block trades, private benefits, privatization, takeovers, bilateral trade, asymmetric information, cashequity offers.

Suggested Citation

  • Mehmet Ekmekci & Nenad Kos & Rakesh Vohra, 2013. "Just Enough or All: Selling a Firm," Working Papers 470, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:470
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    Cited by:

    1. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.
    2. Liu, Tingjun & Bernhardt, Dan, 2024. "Auctioning control and cash-flow rights separately," The Warwick Economics Research Paper Series (TWERPS) 1516, University of Warwick, Department of Economics.
    3. Tingjun Liu & Dan Bernhardt, 2021. "Rent Extraction with Securities Plus Cash," Journal of Finance, American Finance Association, vol. 76(4), pages 1869-1912, August.
    4. Kiho Yoon, 2020. "Bilateral trading with contingent contracts," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 445-461, June.
    5. Marco Pagnozzi & Antonio Rosato, 2014. "Entry by Takeover: Auctions vs. Negotiations," CSEF Working Papers 353, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Liu, Tingjun & Bernhardt, Dan, 2019. "Optimal equity auctions with two-dimensional types," Journal of Economic Theory, Elsevier, vol. 184(C).

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    More about this item

    Keywords

    multidimensional mechanism design; negotiated block trades; private benefits; privatization; takeovers; bilateral trade; asymmetric information; cashequity offers.;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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