OWNERSHIP STRUCTURE, POTENTIAL COMPETITION, AND THE FREE-RIDER PROBLEM IN TENDER OFFERS

Bagnoli and Lipman (1988) have shown that ownership structure is a sig nificant determinant of the division of the gains in tender offers. Th is article extends their model to allow for potential competition and for the bidder to acquire a toehold. We show that for some optimal bid s the number of shares expected to be tendered is less than the number required for control. Moreover, announcement day returns are predicte d to vary cross-sectionally as they reflect both the degree to which t he bid is anticipated and the bargaining power of the target's shareho lders. We show that ''free-rider'' type results in which the target's shareholders capture all of the gains are due to extreme modeling assu mptions.