112 S. Dasgupta and R.G. Hansen
auctions, for avoidance of the winner’s curse requires some careful analysis. Those in-
clined towards rational, equilibrium based models of behavior will be wary of models
that assume incomplete strategic adjustment.Boone and Mulherin (2006b)use unique
data that allows them to characterize sales of companies as either auctions or negoti-
ations, and for the auctions, to say how many potential bidders were contacted in the
sales process and how many actually submitted bids. Finding no relationship between
bidder returns and these measures of competition, Boone and Mulherin conclude that
their findings do not support the existence of a winner’s curse.
A large literature attributes the acquirer wealth losses to managerial agency problems
or “empire building” tendencies. For example, in a sample of 326 U.S. acquisitions
between 1975 and 1987,Morck, Shleifer and Vishny (1990)find that three types of
acquisitions have systematically lower and predominantly negative announcement pe-
riod returns to bidding firms: diversifying acquisitions, acquisitions of rapidly growing
targets, and acquisitions by firms whose managers performed poorly before the acqui-
sition. The authors argue that these results are consistent with the view that managerial
objectives may drive acquisitions that reduce bidding firms’ values.Lang, Stulz and
Walkling (1991)present related results.Jensen (2004)provides a new angle to this ar-
gument by hypothesizing that high market valuations increase managerial discretion,
making it possible for managers to make poor acquisitions when they have run out of
good ones.
Another recent approach to overbidding is based on the idea that when bidders own
initial stakes or “toeholds” in the target firm, they are essentially wearing two hats—that
of a buyer for the target’s remaining shares, and that of a seller of their initial stakes to
the rival bidder. We review the theory-based work in this area more fully below. For
now, we note that in an independent private values model,Burkart (1995)andSingh
(1998)show that a bidder with toehold will bid above her private value in a second-
price auction. Similar results are also obtained in alternative value environments and
under alternative auction procedures (Bulow, Huang and Klemperer, 1999; Dasgupta
and Tsui, 2003). Evidence on the empirical relevance of toeholds, however, is mixed.
InJennings and Mazzeo’s (1993)sample of 647 tender offers and mergers, the mean
toehold is 3%, but only about 15% of the bidders own an initial stake.Betton and Eckbo
(2000)study toeholds for initial and rival bidders in a sample of 1,250 tender offer
contests over the period 1972–1991. They find that toeholds increase the probability of
single-bid success and lower the price paid by the winning bidders.
Betton, Eckbo and Thorburn (2005)delve more deeply into the subtleties of vari-
ous facts about toeholds. In their sample of 12,723 bids for control (3,156 tender offers
and 9,034 mergers), 11% of the bids involved toeholds. The percentage was signif-
icantly higher for tender offers than for mergers, both for non-hostile targets (21%
and 6%, respectively, for tender offers and mergers) and for hostile targets (62% and
31%, respectively). The mean and median toehold sizes conditional on being positive
were 21% and 17%, respectively, for the overall sample. However, a majority of these
toeholds were “long-term toeholds”, i.e., acquired before 6 months prior to the bid.
The percentage of bids involving short-term toeholds for the entire sample was only