The Social Value of Debt in the Market for Corporate Control
35 Pages Posted: 12 Sep 2020
Date Written: September 1, 2020
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.
Keywords: Debt Financing, Debt overhang, Equity Dilution, free-riding, tender offers
JEL Classification: G34
Suggested Citation: Suggested Citation