Ppt Corporate Control
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Transcript of Ppt Corporate Control
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Corporate Finance:Capital structure and corporatecontrol
Yossi SpiegelRecanati School of Business
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Grossman and Hart, BJE 1980
Takeover Bids, the Free-RiderProblem, and the Theory of theCorporation
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Corporate Finance 3
The free rider problemThe timing:
Consider an individual equityholder with equity participation
Let Y be the prob. that the raid succeeds if the equityholder tenders andand N if he does not tender. The equityholder will tender iff
Period 1 Period 2
The firm is establishedby an entrepreneur andis worth X
A raider appears andcan increase valueby R; the raider makes
a tender offer X+P
( ) ( )[ ] ( ) ( )[ ]4 4 4 4 34 4 4 4 214 4 4 4 34 4 4 4 21
t tenderDon'Tender
11 X R X X P X N N Y Y ++++
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Corporate Finance 6
DilutionIf the takeover succeeds, the raider can
steal from the firm ( is implied by thefirms charter)
The condition for tendering:
The raiders payoff
The takeover will succeed iff > C
( ) ( )[ ] ( ) ( )[ ] { 3214 4 4 4 34 4 4 4 214 4 4 34 4 4 21t tenderDon'Tendert tenderDon'Tender
11 ++++ RP X R X X P X
( ) C C R X R X =++ 43421321
Paymentpayoff postEx
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Corporate Finance 7
Probabilistic CSuppose that C ~ [0, ) according to
F(C)
The takeover succeeds with prob. F( )
The firms value ex ante:
( ) ( )( ) ( )( ) ( ){
+=++= R
PF X X F P X F V 1
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Corporate Finance 8
The optimal choice of F.O.C for :
( ) ( )( ) ( ){( )( )( ) 10'
PdecreasedfromcostMarginal
takeoverof probincreasedfrom
benefitMarginal===
RF
f F R f V 43421
1
* R
( )( )( ) RF f
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Stulz, JFE 1988
Managerial Control of Voting Rights:Financing Policies and the Market forCorporate Control
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Corporate Finance 10
The modelThe timing:
The raider has benefits of control B~[0, )
To take over the firm the raider needs of the equity
The raider can try to acquire shares from outsiders. Thesupply of shares is (1- )S(p), where S(p) > 0 (moreoutsiders submit shares when p is higher)
Stage 0 Stage 2
The firm is established,the entrepreneur keepsequity and issues 1- to outsiders
A raider shows up andmay offer p to acquire of the shares
Stage 1
Cash flow X isrealizedirrespective ofthe takeover
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Corporate Finance 11
TakeoverTo induce a takeover, p needs to be
p( ) > 0: p
1/2
p
(1- )S(p)
P( )
( ) ( ) ( ) p p pS == 21
1
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Corporate Finance 12
TakeoverThe raider will take over iff B p( )
the prob. of takeover is 1-F(p( ))
The entrepreneurs payoff:
( ) {
( )( ) ( ) ( )( )( ) ( )[ ]
( )( ) ( ) ( )( )( ) ( )
p pF pF B X
p pF X pF B X Y
E
E
++=
+++=
11
11sharesSoldbenefitsPrivatesharesRetained
4 4 4 4 4 34 4 4 4 4 2143421
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Corporate Finance 13
The optimal choice of F.O.C for :
When , then (1- )S(p) = iff S(p) 1 p and F(p) 1:
( ) ( ) ( )[ ] ( )( ) ( )
( ) ( )( )( ) ( ) ( )( )( ) ( )
0
1'11
'1'
effectQuantitysharessoldof priceon theEffect
takeoverof prob.on theEffect
=
+
=
4 4 4 34 4 4 214 4 4 4 34 4 4 4 21
4 4 4 4 4 34 4 4 4 4 21
p pF p pF
p p f p BY E
( ) ( ) ( )( ) ( ) 021'212
2121'
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Corporate Finance 14
The optimal choice of When = 0:
If p(0) > p(0) then y(0) > 0 so * > 0
( ) ( )[ ] ( )( ) ( ) ( )( )( ) ( ) ( )( )( ) ( )
( )[ ] ( )( ) ( ) ( )( )( ) ( ) ( )( )00'010'00
0010'010'000'effectOwnershipeffectPricetakeoverof prob.on theEffect
p p pF p p f p B
p pF p pF p p f p BY
E
E
+=
+=4 4 34 4 214 4 4 34 4 4 214 4 4 4 34 4 4 4 21
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Israel, JF 1991
Capital Structure and the Marketfor Corporate Control: TheDefensive Role of Debt Financing
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Corporate Finance 16
The modelThe timing:
The value of the firm under the entrepreneur is 0
The value of the firm under the raider is R ~[0, ) with mean ER
If a takeover takes place, R is split between the entrepreneurand the raider in proportions and 1-
Stage 0 Stage 2
The firm is establishedby an entrepreneurand issues debt withface value D
A raider shows up andmay takeover the firm
Stage 1
Cash flow X isrealized anddebt is due
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Corporate Finance 18
The choice of debtThe value of the firm:
The f.o.c for D:
( ) ( ) ( ) ( )434214 4 34 4 21
DebtEquity
+= D D
R DdF RdF D R DV
( ) ( ) ( ) ( )
( ) ( )( ) ( )0
11
'
=+=
++=
D Df DF
D Df RdF RdF DV D D
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Corporate Finance 19
The choice of debtRewriting f.o.c:
At the optimum,
D* > 0D* <
Comparative stats: D
( )( ) ( ) = 11 D DH DF D Df
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Corporate Finance 20
Illustrating the first-order conditions
D
DH(D)
1-
D*
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Corporate Finance 21
Illustrating the model
R1
Rf(R)
Df(R)
D
Rf(R)