STOCK-PRICE MANIPULATION THROUGH TAKEOVER BIDS

The announcement of a takeover bid causes significant increases in the target's stock price, but the possibility that a bid is motivated to cause this increase so that the bidder can sell his holdings has not b een studied. We show that stock price manipulation lowers the prebid s tock price. Furthermore, if there is little takeover activity, manipul ation increases takeover bids and prevents some efficient takeovers. I n this case, stockholders prefer to ban it. However, if there is a hig h level of takeover activity, serious bidders are better off and socia l surplus is increased by the possibility of manipulation. In this cas e, stockholders may oppose a ban.