Working Paper: CEPR ID: DP15249
Authors: Mike Burkart; Samuel Lee; Henrik Petri
Abstract: How should bidders fi nance tender offers when the objective of the takeover is to improve incentives? In such a setting, debt fi nance has bene fits even when bidders have deep pockets: It ampli es incentive gains, imposes Pareto sharing on bidders and free-riding target shareholders, and makes bidding competition more efficient. High leverage, independent of fi nancing needs, can be privately and socially optimal. Although takeover debt dilutes target shareholders, they may benefi t most from it, especially when bidding is competitive.
Keywords: tender offers; freeriding; debt financing; debt overhang; equity dilution
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt financing (G32) | bidder incentives (D44) |
| debt financing (G32) | efficiency of bidding competition (D44) |
| high leverage (G19) | governance and performance in acquired firm (G34) |
| high leverage (G19) | target shareholders benefits (G34) |
| debt financing (G32) | Pareto improvements (D61) |
| bootstrapping practices (M13) | beneficial outcomes for target shareholders (G34) |