This paper models, and experimentally simulates, the free-rider problem in a takeover when the raider has the option to “resolicit,” that is, to make a new offer after an offer has been rejected. In theory, the option to resolicit, by lowering offer credibility, increases the dissipative losses associated with free riding. In practice, the outcomes of our experiment, while quite closely tracking theory in the effective absence of an option to resolicit, differed dramatically from theory when a significant probability of resolicitation was introduced: The option to resolicit reduced the costs of free riding fairly substantially. Both the raider offers and the shareholder tendering responses generally exceeded equilibrium predictions.
JEL classification: G3, C7
Key words: corporate takeovers, experimental economics, resolicit
The authors thank Lucy Ackert, Kent Daniel, Chung Kim, and John Van Huyck for helpful comments and discussions. They also thank participants of the 1998 Economic Science Association Meetings in Mannheim, the Microeconomic Theory Experimental Workshop at Texas A&M University, and the 2000 Winter Meetings of the Econometric Society. They are also grateful to Jean-Francois Guimond, Ping Hu, Ufuk Ince, Bing-Xuan Lin, and Joseph Miller for research help. Gillette acknowledges financial support from the College of Business Administration, Georgia State University. This paper was completed while Gillette was a visiting scholar at the Federal Reserve Bank of Atlanta. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Ann B. Gillette, Department of Finance, J. Mack Robinson College of Business, Georgia State University, University Plaza, Atlanta, Georgia 30303-3083, 404-651-2671, 404-651-2630 (fax), firstname.lastname@example.org, or Thomas H. Noe, A.B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118-5669, 504-865-5425, email@example.com.
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