Inefficient Sales of Corporate Control Under Mandatory Bid Rule

Abstract

Separating the value-increasing takeovers from the value-decreasing takeovers is the ideal goal in designing the legal rule on takeovers. The previous studies showed that the Mandatory Bid Rule stops all of the inefficient sales of corporate control. However, this paper, by using the negative private benefits model, refutes this proposition which assumes that private benefits of control are positive. To justify the assumption of negative private benefits, this study examines two events that the standard model cannot explain, but the negative private benefits model does. The Mandatory Bid Rule is not a perfect screen to stop inefficient takeovers.