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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 50:
The Optimality of the Mandatory Bid Rule

Clas Bergström (), Peter Högfeldt () and Johan Molin

Abstract: A recent legislative directive from the Commission of the European Community proposes and enactment of a Mandatory Bid Rule (MBR): a bidder trying to acquire control of a firm should be required to extend the offer for all shares of the firm. This paper analyzes how adoption of such a rule affects shareholder wealth and allocative efficiency. We derive a general design principle, which precisely characterizes when the MBR is in the interest of the shareholders and when it is not, and evaluate the MBR as a policy instrument. The design principle is shown to closely approximate the choice of the optimal bidform.

Keywords: Takeovers; corporate finance; corporate governance; auctions regulations; (follow links to similar papers)

JEL-Codes: G34; G38; (follow links to similar papers)

34 pages, March 1995

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