Comments Welcome Takeover Bidding with Toeholds: The Case of the Owner's Curse

This paper demonstrates that winning a takeover bidding contest can be `bad news' and, consequently, losing can be `good news.' This is true even when all bidders act rationally in their own best interests with perfect information on their valuations. Bidders with toeholds rationally bid above their valuations and possibly su er losses in equilibrium. This equilibrium strategy of `bidding to lose' played by partial owners leads to the `owner's curse.' The paper provides an explanation for acquirer losses without recourse to managerial `hubris' and/or agency problems. The presence of partial owners also has strong implications for the choice of selling mechanisms: rms should not be sold using a rst price sealed-bid auction. The presence of large blockholders also acts as a costless defensive measure and partially substitutes for other costly defensive measures. The model gives rise to predictions on (1) the type of acquirers more likely to make losses; (2) the choice of auction procedures; (3) the e ect of managerial ownership on rm value; (4) the existence of initial bid premia; and (5) the incentives of rms to engage in share repurchase, private placement and debt-for-equity swaps in the face of a takeover threat.