Strategic Nondisclosure in Takeovers
Li, Jing, Liu, Tingjun, Zhao, Ran
The Accounting Review · 2022 · Volume 97 · Issue 4
Abstract
We examine takeover auctions when an informed bidder has better information about the target value than a rival and target shareholders. The informed bidder's information is either hard or soft, and only hard information can be credibly disclosed. We show that withholding information creates a winner's curse, thereby serving as apreemptiondevice that deters the rival's participation. In turn, an endogenous disclosure cost arises that induces the informed bidder to optimally withhold favorable information to minimize the acquisition price—breaking down the standard unraveling result, even if his information is always hard. Perhaps surprisingly, stronger competition from the uninformed bidder canreducethe target shareholders' payoff andincreasethe payoff of the informed bidder while unambiguously improving social welfare. Moreover, “hardened” information can reduce the gains to trade, decreasing welfare, but increasing shareholders' payoff. Our results provide a cautionary note to promoting more competition and more disclosure. JEL Classifications:D44; D82; G34; M41.
Keywords
takeovers, voluntary disclosure, winner's curse, asymmetric bidders
Enable JavaScript for citation tools and additional paper interactions.