Signalling to Dispersed Shareholders and Corporate Control

Mike Burkart, Samuel Lee

Control,
Activism

Series number :

Serial Number:

431/2014

Date posted :

July 01 2014

Last revised :

July 14 2014

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Keywords

tender offers •
Investor Activism •
Signalling •
free-rider problem •
means of payment •
Unbundling Ownership and Control •
Empty Voting

This paper analyses how outsiders, such as bidders or activist investors, overcome the lack of coordination and information among dispersed shareholders. We identify the two basic means to achieve this goal. First, the outsider must relinquish private benefits in a manner that is informative about security benefits.

We show under which conditions this is feasible and which acquisition strategies used in practice meet these conditions. Second, the outsider can alternatively use derivatives to drive a wedge between her voting power and her economic interest in the firm. Such separation of ownership and control, while typically considered a source of corporate governance problems, is an efficient response to the frictions dispersed ownership causes for control contestability.

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