[This study examines takeover bidding contests in which privately informed bidders have incentives to signal high values to uninformed investors through their bids. Such incentives could arise in a large number of situations from financing and managerial concerns. The findings show that the dynamic nature of the takeover contests plays a critical role in the signaling process, allowing bidders to signal high values in two ways. Such signaling bears important consequences on the bids, the allocative efficiency, the target's and bidders' profits, as well as the winner's post-takeover stock price performance and volatility.]

This study examines takeover bidding contests in which privately informed bidders have incentives to signal high values to uninformed investors through their bids. Such incentives could arise in a large number of situations from financing and managerial concerns. The findings show that the dynamic nature of the takeover contests plays a critical role in the signaling process, allowing bidders to signal high values in two ways. Such signaling bears important consequences on the bids, the allocative efficiency, the target's and bidders' profits, as well as the winner's post-takeover stock price performance and volatility. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

We consider a classical auction setting in which an asset/project is sold to buyers who privately receive signals about expected payoffs, and payoffs are more sensitive to a bidder's signal if he runs the project than if another bidder does. We show that a seller can increase revenues by sometimes allocating cash‐flow rights and control to different bidders, for example, with the highest bidder receiving cash flows and the second‐highest receiving control. Separation reduces a bidder's information rent, which depends on the importance of his private information for the value of his awarded cash flows. As project payoffs are most sensitive to a bidder's information if he controls the project, allocating cash flow to another bidder lowers bidders' informational advantage. As a result, when signals are close, the seller can increase revenues by splitting rights between the top two bidders.

We consider firms that, all else equal, wish to minimize variability in their internal capital (due to convex costs of raising external funds). The firms can hedge the cash flow risk of the project, but not that of winning or losing the auction. We characterize optimal hedging and bidding strategies in this competition framework. We show that access to financial markets makes firms bid more aggressively, possibly even above their valuation for the project. In addition, hedging increases the variance of bids and makes firm values more dispersed. Further, with hedging, the covariance of internal capital changes with the risk factor is negative, and is more negative, the higher the correlation of the hedging instrument with the risk factor.

ABSTRACT In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.

We endogenize entry to a security-bid auction, where participation is costly and bidders must decide given their private valuations whether to participate. We first consider any minimum reserve security-bid of a fixed expected value that weakly exceeds the asset's value when retained by the seller. DeMarzo, Kremer, and Skrzypacz (2005) establish that with a fixed number of bidders, auctions with steeper securities yield the seller more revenues. Counterintuitively, we find that auctions with steeper securities also attract more entry, further enhancing the revenues from such auctions. We then establish that with optimal reserve securities, auctions with steeper securities always yield higher expected revenues. (JEL D44)

ABSTRACT We examine takeover auctions when an informed bidder has better information about the target value than a rival and target shareholders. The informed bidder's information is either hard or soft, and only hard information can be credibly disclosed. We show that withholding information creates a winner's curse, thereby serving as a preemption device that deters the rival's participation. In turn, an endogenous disclosure cost arises that induces the informed bidder to optimally withhold favorable information to minimize the acquisition price—breaking down the standard unraveling result, even if his information is always hard. Perhaps surprisingly, stronger competition from the uninformed bidder can reduce the target shareholders' payoff and increase the payoff of the informed bidder while unambiguously improving social welfare. Moreover, “hardened” information can reduce the gains to trade, decreasing welfare, but increasing shareholders' payoff. Our results provide a cautionary note to promoting more competition and more disclosure. JEL Classifications: D44; D82; G34; M41.