Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 50: The Optimality of the Mandatory Bid Rule

Clas Bergström (), Peter Högfeldt () and Johan Molin
Additional contact information
Clas Bergström: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Peter Högfeldt: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Johan Molin: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

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

JEL-codes: G34; G38

34 pages, March 1995

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