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Less Popular but More Effective Toeholds in Corporate Takeovers

Published online by Cambridge University Press:  08 June 2020

Yun Dai*
Affiliation:
Dai, daiy28@mail.sysu.edu.cn, Sun Yat-sen University Lingnan College
Sebastian Gryglewicz
Affiliation:
Gryglewicz, gryglewicz@ese.eur.nl, Erasmus University Rotterdam
Han T. J. Smit
Affiliation:
Smit, jsmit@ese.eur.nl, Erasmus University Rotterdam
*
Dai (corresponding author), daiy28@mail.sysu.edu.cn

Abstract

Despite their claimed advantages, toehold strategies have rarely been adopted in recent corporate takeovers and do not seem to increase acquirer returns. Are toeholds ineffective and becoming obsolete? We show that this is not the case. We find that toeholds are preferred for executing difficult takeovers. After controlling for such endogeneity in toehold-based acquisitions, toeholds do increase returns to acquirers. Moreover, the performance of toehold strategies improves over time due to more selective and more effective acquisition of toeholds. We find that this time trend is in part explained by learning from past toehold acquisitions.

Type
Research Article
Copyright
© Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We are grateful to Jarrad Harford (the editor) and an anonymous referee for their valuable feedback and suggestions. We also thank Nicholas Crain, Espen Eckbo, Rudi Fahlenbrach, Marc Gabarro, Iftekhar Hasan, Paul Irvine, Chunmei Lin, Marc Lipson, Qinghao Mao, Agnieszka Markiewicz, Stefan Obernberger, Enrico Pennings, Jeffrey Pontiff, Raghu Rau, Elvira Sojli, Martijn J. van den Assem, Dick van Dijk, Patrick Verwijmeren, Vadym Volosovych, Henk von Eije, Wim Westerman, James Weston, Remco Zwinkels, and seminar and conference participants at the 2016 AFFI conference, the 2016 Asian Meeting of the Econometric Society, the 2016 China meeting of the Econometric Society, the Erasmus Research Institute of Management, the 2016 Financial Management Writers’ Workshop, the 2014 Financial Management Association (FMA) European Conference, the 2015 Paris Financial Management Conference, the Tinbergen Institute, and the University of Groningen for their helpful comments. Dai acknowledges financial support by the National Natural Science Foundation of China (Grant No. 71803201, 71703175, 71873149, and 71721001) and the Major Program of the National Social Science Foundation of China (Grant No. 17ZDA073). All remaining errors are our own.

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