Are Bad Bidders Good?

Abstract

In prevailing theoretical models of takeovers, initial bidders face the free-rider problem and/or competition. As a consequence, good bidders may be discouraged from making offers that would achieve economic improvements. Our model explains how the activities of bad bidders (bidding firms that initiate takeovers for hubris or agency reasons) enable good bidders to capture part of their improvement despite the free-rider problem. By encouraging takeovers that accomplish improvements, bad bidders stimulate positive social gains. Existing empirical evidence reviewed isconsistent with our model.

JEL Classification: G34