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Noise Trading and Takeovers

Albert S. Kyle and Jean-Luc Vila
The RAND Journal of Economics
Vol. 22, No. 1 (Spring, 1991), pp. 54-71
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2601007
Page Count: 18
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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.
Noise Trading and Takeovers
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Abstract

A model of takeovers is investigated in which "noise trading" provides camouflage that makes it possible for a large corporate outsider to purchase enough shares at favorable prices so that takeovers become profitable. Although the model accommodates the possibility of dilution (Grossman and Hart, 1980) and a large incumbent shareholder (Shleifer and Vishny, 1986), neither dilution nor a large incumbent shareholder is necessary for costly takeovers to be profitable. Noise trading tends to encourage costly takeovers that otherwise would not occur and to discourage beneficial takeovers that otherwise would occur.

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