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Stock Price Manipulation Through Takeover Bids

Mark Bagnoli and Barton L. Lipman
The RAND Journal of Economics
Vol. 27, No. 1 (Spring, 1996), pp. 124-147
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555795
Page Count: 24
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Stock Price Manipulation Through Takeover Bids
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Abstract

The announcement of a takeover bid causes significant increases in the target's stock price, but the possibility that a bid is motivated to cause this increase so that the bidder can sell his holdings has not been studied. We show that stock price manipulation lowers the prebid stock price. Furthermore, if there is little takeover activity, manipulation increases takeover bids and prevents some efficient takeovers. In this case, stockholders prefer to ban it. However, if there is a high level of takeover activity, serious bidders are better off and social surplus is increased by the possibility of manipulation. In this case, stockholders may oppose a ban.

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