Potential heterogeneity in target’s value and jump bidding in takeover auctions

ABSTRACT

This ticle analyses the pre-emptive jump bidding equilibrium in takeover auctions when bidders’ valuations of the target firm follow truncated normal distribution. It shows that potential heterogeneity of the targets’ value, measured by the standard deviation of the bidders’ valuation function, is especially important when it is small and, for extremely small values, the second bidder is almost always pre-empted. It also shows that, contrary to regular clock-style auctions, the increase in standard deviation may negatively affect the expected profit of the first bidder.

KEYWORDS:

• Auction
• acquisition
• takeover
• preemptive bidding
• jump bidding

JEL CLASSIFICATION:

• C72
• D82
• G34

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Telfer School of Management Research Grant