Optimal Toeholds in Takeover Contests

Posted: 2 Aug 2005

See all articles by Eitan Goldman

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance; European Corporate Governance Institute (ECGI)

Jun "QJ" Qian

Fanhai International School of Finance, Fudan University

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Abstract

We offer an explanation for why raiders do not acquire the maximum possible toehold prior to announcing a takeover bid. By endogenously modeling the target firm's value following an unsuccessful takeover we demonstrate that a raider may optimally acquire a small toehold even if the acquisition does not drive up the pre-tender target price. This occurs because although a larger toehold increases profits if the takeover succeeds it also conveys a higher level of managerial entrenchment and hence a lower firm value if the takeover fails. We derive new predictions regarding the optimal toehold and target value following a failed takeover. We also examine the impact of a rival bidder and dilution.

Keywords: Toehold, entrenchment, free-rider problem, takeover, tender offer

JEL Classification: G34, D8, K22

Suggested Citation

Goldman, Eitan and Qian, Jun, Optimal Toeholds in Takeover Contests. Journal of Financial Economics, Vol. 77, No. 2, pp. 321-346, August 2005, Available at SSRN: https://ssrn.com/abstract=768744

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Jun Qian (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
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86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

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