Signalling to Dispersed Shareholders and Corporate Control. (22nd January 2015)

• Record Type: Journal Article
• Authors: Burkart, Mike; Lee, Samuel
• Is Part Of: Review of economic studies. Volume 82:Number 3(2015:Jul.)
• Page Start: 922
• Page End: 962
• Publication Date: 2015-01-22
• Subjects: Tender offers -- Investor activism -- Signalling -- Free-rider problem -- Means of payment -- Unbundling -- Ownership and control -- Empty voting; G32; Economics -- Periodicals; 330
• DOI: 10.1093/restud/rdv005
• Languages: English
• ISSNs: 0034-6527

Abstract

Abstract: This article analyses how outsiders, such as bidders or activist investors, overcome the lack of coordination and information among dispersed shareholders. We identify the two basic means to achieve this goal. First, the outsider must relinquish private benefits in a manner that is informative about security benefits. We show under which conditions this is feasible and which acquisition strategies used in practice meet these conditions. Second, the outsider can alternatively use derivatives to drive a wedge between her voting power and her economic interest in the firm. Such unbundling of ownership and control, while typically considered a source of corporate governance problems, is an efficient response to the frictions dispersed ownership causes for control contestability. We also show that unbundling comes with costs and benefits for the bidder's incentives to improve firm value.