(Ir)responsible Takeovers

Takeovers change corporate policies, affecting both firm value and externalities imposed on various stakeholders. How, if at all, do shareholders, bidders and incumbents respond to externalities in takeovers? We study this question by introducing externalities and social preferences into a canonical model of takeovers (Bagnoli and Lipman 1988). Our analysis highlights the interplay between the holdout problem in takeovers (Grossman and Hart 1980) and free riding in public good provision. We show that the dual free-riding problems offset each other. Shareholders' preferences over externalities generated by firms they have divested from play a key role. If shareholders care about such externalities, then acquisitions succeed if and only if they are socially efficient, free-riding problems notwithstanding. Moreover, both incumbents and bidders have incentives to maximize the social value of the firm. In contrast, "warm-glow" shareholders accept some socially inefficient acquisitions while rejecting some socially efficient ones; and incumbents and bidders generally respond by adopting socially inefficient policies. Incumbents use corporate social responsibility as a takeover defense. Social responsibility by bidders is counterproductive if target shareholders care about divested externalities, but helps offset inefficiencies created by warm-glow shareholders. Overall, our analysis sheds light on the intricate interplay between shareholder behavior, social responsibility, and acquisition dynamics.