The Social Value of Debt in the Market for Corporate Control

35 Pages Posted: 12 Sep 2020

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI); Swedish House of Finance

Henrik Petri

University of Bath

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2020

Abstract

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

Burkart, Mike C. and Lee, Samuel and Petri, Henrik, The Social Value of Debt in the Market for Corporate Control (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3688203

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Samuel Lee

Santa Clara University - Leavey School of Business

500 El Camino Real
Santa Clara, CA California 95053
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Henrik Petri

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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