Risk Arbitrageurs, Insider Trading, and Allocation of Property Rights in Tender Offers

Abstract

Previous theoretical work has shown that bidders in tender offers capture a larger share of the synergy gains when the target's ownership structure is concentrated. Thus, tipping off risk arbitrageurs may facilitate tender offers by concentrating the target's ownership structure. However, I show that only bidders with initial stakes smaller than a critical level will choose to selectively reveal information prior to the bid. Bidders with stakes greater than the critical level will prefer to keep their intentions secret. If they cannot, less information about potential targets will be generated. These results provide a rationale for treating information about impending tender offers as the bidder's property. These results also suggest that compliance with the Williams Act increases the incentive to violate SEC Rule 14e-3, and vice versa.

JEL Classification: G34, G38, K22