Advising Shareholders In Takeovers

This paper studies the advisory role of a target company board in takeovers. I show that coordination failures among target shareholders, such as free-riding, limit the board’s ability to properly advise shareholders whether accepting a takeover o¤er is in their best interest based on its information. Even if there are no agency problems and the board’s objective is to maximize shareholders’value, the board conceals information from shareholders in equilibrium, and shareholders might be better o¤ if they could commit to ignoring the board’s advice. By contrast, when the board is biased and behaves opportunistically, it becomes possible for information to be fully revealed and, consequently, shareholders’welfare might increase. More broadly, the paper emphasizes the potential value of an expert’s bias when advising a group of agents whose collective actions must be coordinated. The paper discusses shareholder activism in takeovers and communication during debt restructuring as examples for possible applications. Keywords: Coordination, Tender O¤er, Takeover, Merger, Advice, Communication, Cheap-Talk, Free-riding, Externalities JEL Classi…cation Numbers: D74, D82, D83, D62, G34, K22 The author is from Stanford University, Graduate School of Business. I am grateful to Anat Admati, Peter DeMarzo, Ilan Kremer, Bilge Yilmaz, Je¤rey Zwiebel, and seminar participants at Stanford GSB and Stanford Economics department for helpful comments. Address for correspondence: 518 Memorial Way, Stanford Graduate School of Business, Stanford, CA, 94305. Email: [email protected]