The Takeover Game

While shareholders direct influence on management decisions may be small, the takeover threat could serve as an indirect but effective mechanism for shareholders to influence management. We introduce the takeover game, an experimental asset market characterized by two important features: (1) periodic dividend payments to shareholders are endogenously decided by management, and (2) shareholders can accept an outside tender offer to depose management. Investors trade shares in a double auction market that pays a dividend at the end of each period determined solely by the manager, and decide whether to accept a takeover offers made in pre-determined periods. This novel setting has the flavor of a repeated trust game, but allows the shareholders, through a market mechanism, to price the amount of trust they have in management. Despite the unique subgame perfect equilibrium outcome in which the first takeover offer is accepted and no dividends are ever paid out, we find that the market often survives takeover offers. Managers pay positive dividends and appear to do so strategically taking into account periods in which takeover offers will be made. While prices are not directly responsive to dividends, we find that market prices are a good indication of when shareholders intend to accept the takeover offer.