Working Paper: CEPR ID: DP6241
Authors: Christian At; Mike Burkart; Samuel Lee
Abstract: This paper analyzes how non-voting shares affect the takeover outcome in a single-bidder model with asymmetric information and private benefit extraction. In equilibrium, the target firm's security-voting structure influences the bidder's participation constraint and in response the shareholders' conditional expectations about the post-takeover share value. Therefore, the structure can be chosen to discriminate among bidder types. Typically, the socially optimal structure deviates from one share - one vote to promote all and only value-increasing bids. As target shareholders ignore takeover costs, they prefer more takeovers and hence choose a smaller fraction of voting shares than is socially optimal. In either case, the optimal fraction of voting shares decreases with the quality of shareholder protection and increases with the incumbent manager's ability. Finally, shareholder returns are higher when a given takeover probability is implemented by (more) non-voting shares rather than by (larger) private benefits.
Keywords: dual-class share structure; free-rider behaviour; tender offer
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Security-voting structure (D72) | Bidder's participation constraint (D44) |
| Fraction of nonvoting shares (G34) | Expected post-takeover share value (G34) |
| Deviations from one-share, one-vote (D72) | Freerider problem (H40) |
| Expected post-takeover share value (G34) | Bid price (D44) |
| Optimal security-voting structure (D72) | Takeover outcomes (G34) |