FIN-03-018 |
NYU Stern School of Business |
July 2003
Holger M. Mueller and Fausto Panunzi
ABSTRACT
We examine the role of leverage in tender offers for widely held firms. Leverage
allows raiders to appropriate part of the value gains arising from takeovers,
hence reducing the takeover premium and mitigating the free-rider problem. Leveraged
takeovers may thus be profitable even if target shareholders are dispersed.
Bankruptcy costs, incentive problems on the part of the raider, and defensive
leveraged recapitalizations and asset sales by the target management all limit
the raider’s ability to borrow, thus shifting takeover gains to target shareholders
and reducing the takeover likelihood. While bankruptcy costs are a social cost,
the takeover premium is merely a wealth ansfer to target shareholders. As
the raider does not maximize social welfare, he uses too much debt compared
to the social optimum.
Holger H. Mueller
Institution: Stern School of Business, New York University, 44th West 4th Seet,
New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: hmueller@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~hmueller
Fausto Panunzi
Institution: Dipartimento di Scienze Economiche, Università di Bologna, Piazza
Scaravilli, 2, 40 26 Bologna, Italy
Email: fpanunzi@economia.unibo.it
To download a copy of this paper click here
To request a copy of this paper click here
|