The Social Value of Debt in the Market for Corporate Control

The Social Value of Debt in the Market for Corporate Control

Mike Burkart, Samuel Lee, Henrik Petri

Series number :

Serial Number: 
698/2020

Date posted :

September 11 2020

Last revised :

September 11 2020
SSRN Share

Keywords

  • takeovers • 
  • Leveraged buyouts • 
  • free-rider problem • 
  • Bidding Competition

How should bidders finance tender offers when the objective of the takeover is to improve incentives? In such a setting, debt finance has benefits even when bidders have deep pockets: It amplifies incentive gains, imposes Pareto sharing on bidders and free-riding target shareholders, and makes bidding competition more efficient.

High leverage, independent of financing needs, can be privately and socially optimal. Although takeover debt dilutes target shareholders, they may benefit most from it, especially when bidding is competitive.

Authors

Real name:
Fellow, Research Member
London School of Economics and Political Science
Dr
Real name:
Research Member
Leavey School of Business, Santa Clara University
Real name:
Henrik Petri