[This article demonstrates that a potential acquirer with a toehold bids aggressively and possibly overpays in equilibrium. The aggressiveness of a bidder with a toehold increases further if he is able to renege on his winning bid. A bidder without a toehold, however, responds by shading his bids. The target firm can increase competition and the expected sale price if it only entertains nonretractable bids. This article provides testable implications on the probability of bidder success, stock price reactions on bid revisions and on resolution of the contest, and expected gains to bidders and the target firm.]

This article demonstrates that a potential acquirer with a toehold bids aggressively and possibly overpays in equilibrium. The aggressiveness of a bidder with a toehold increases further if he is able to renege on his winning bid. A bidder without a toehold, however, responds by shading his bids. The target firm can increase competition and the expected sale price if it only entertains nonretractable bids. This article provides testable implications on the probability of bidder success, stock price reactions on bid revisions and on resolution of the contest, and expected gains to bidders and the target firm.