SSE/EFI Working Paper Series in Economics and Finance
Optimal deterrence and inducement of takeovers: An analysis of poison pills and dilution
Abstract: The paper presents a theoretical alternative to the
commonly held belief that poison pills affect shareholder wealth
negatively. Specifically, the paper models how ex ante shareholder wealth
can be maximized with contractual provisions that resemble poison pill
plans and, reversely, voluntary dilution à la Grossman and Hart (1980) by
allowing an optimal choice of takeover probabilities and premia. The
model's predicitions are consistent with recent empirical evidence [Comment
and Schwert (1995)]. The paper shows that, under optimal employment of the
proposed provisionsa, the comparative statics on takeover probabilities and
premia differ partially from those proposed in Shleifer and Vishny (1986).
As an extension, an analysis of the wealth effects of changes in the
control threshold, as implied by, e.g., supermajority rules and a mandatory
bid rule, is conducted.
Keywords: Takeover defense; poison pills; dilution; (follow links to similar papers)
JEL-Codes: G34; (follow links to similar papers)
34 + vii pages, February 1996
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