Most of the theoretical literature on tender offers has been devoted to illustrating the positive effects of the toehold on the bidder's profits. Empirical research, however, shows that a high proportion of bidders do not trade on the target's shares prior to the tender offer announcement. This paper presents a model in which the bidder trades in the open market before announcing a tender offer and the incumbent shareholders form beliefs about the rival's quality given the order size. Market liquidity allows the potential bidder to partially hide her trade, and thus insiders are not able to ascertain whether an increase in volume indicates toehold acquisition. Stock price prior to the announcement date and market perception about the probability of a takeover are therefore contingent on players actions. We show that in some situations no trade will be optimal, and a negative relationship between takeover premium and toehold size arises. Interestingly, stock liquidity and initial stake are positively related. Our results also provide a theoretical basis for the observed pre-bid stock price dynamics. In particular, we show that the ratio between price runup and bid premium is increasing in the toehold size.

Currency crises can arise because it is optimal to bail out financially distressed exporting firms through a currency depreciation. Exporting firms will not undertake profitable investments when high leverage causes debt overhang problems. A currency depreciation increases the profitability of new investments when revenues are foreign-currency denominated and domestic-currency costs are nominally rigid. Ex ante, currency depreciation leads to excessive investment in risky projects even if safer, more valuable projects are available. However, currency depreciation is optimal ex ante if the risky projects have higher expected returns and if firms must rely on debt financing because of underdeveloped equity markets.