Legal Investor Protection and Takeovers

Abstract

This paper examines the role of legal investor protection for the efficiency of the market for corporate control when bidders are financially constrained. In the model, stronger legal investor protection increases bidders' outside funding capacity. However, absent effective bidding competition, this does not improve efficiency, as the bid price-and thus the bidder's need for funds-increases one-for-one with his pledgeable income. In contrast, under effective competition for the target, the increased outside funding capacity improves efficiency by making it less likely that more efficient but less wealthy bidders are outbid by less efficient but wealthier rivals.

Transfers of corporate control in firms with noncontrolling blockholders

“…In my model, investor protection acts through a totally different channel: it affects the rent that the acquirer can obtain from a takeover. I certainly do not claim that my framework is more relevant than the one of Burkart et al (2014). The value of my analysis of investor protection is that: (i) it offers an alternative perspective of how can one think about the impact of investor protection on the takeover market, and (ii) it shows that investor protection may actually decrease efficiency under certain circumstances.…”

“…However, the effects of investor protection on the market for corporate control have received relatively little attention. The model by Burkart et al (2014) argues that better investor protection leads to a more efficient takeover market, because it increases the pledgeable income of the bidder. As a result, the role of internal funds in financing a takeover is reduced, and bidder's efficiency as opposed to availability of internal funds becomes more important in determining the winner in a takeover contest.…”

“…When the raider is obliged to extend her offer to all shareholders and, in addition, cannot freeze out those who refuse to tender, takeovers are already so costly that any extra protection of investors risks to "overkill" takeovers. Burkart et al (2014) provide an argument why the market for corporate control may be more efficient in countries with better legal protection of investors. In their article, stronger investor protection increases the pledgeable income of the bidder, thereby reducing the role of internal funds in financing a takeover.…”

Partial Vertical Integration, Ownership Structure, and Foreclosure

“…4 Our paper merges ideas from corporate finance and from industrial organization. From a corporate finance perspective, our paper is related to the literature on takeovers (e.g., Grossman and Hart 1980;Bebchuk 1994;Panunzi 1998, 2000;Burkart et al 2014;Israel 1992;and Zingales 1995). This literature, however, abstracts from the interaction between the market for corporate control and competition in the product market and how this interaction depends on the initial ownership structure of the target.…”

“…The relative bargaining power of D 1 vis-à-vis U 1 's initial controller would matter, however, if D 1 has some fixed cost associated with initiating a takeover. Then, the lower D 1 's bargaining power, the less likely the takeover is.26 If the offer is conditional on success, the shareholders are indifferent between submitting and not submitting shares when the offer fails.27 The same equilibrium selection criterion is also used inGrossman and Hart (1980);Burkart, Gromb, and Panunzi (1998);and Burkart et al (2014). It rules out the implausible scenario where the target's shareholders tender at prices below the status quo value of the target.…”