PRE-BID ACQUISITIONS OF TARGET STOCK AND MANAGEMENT-CONTROLLED EQUITY

This paper addresses the question of how target manager entrenchment impacts on bidders ’ initial takeover strategy, which comprises the toehold and the initial bid premium decisions, modeled as conjoint. We document several empirical regularities. The first is that the toehold alone has no explanatory power in explaining bidders ’ takeover strategy. The second finding is that a cost savings construct internalizing the toehold and premium choices satisfactorily identifies the drivers of initial takeover strategies. Since our measure of cost savings is a direct measure of free rider cost savings, our conclusion is that free rider costs drive toehold and initial bid premium choices. Third, we show empirically that toeholder cost savings are increasing in the target management block after controlling for likely determinants of the toehold/principal outsider decision. Hence, free rider cost savings are higher for owner mangers than entrenched managers