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Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation

Sanford J. Grossman and Oliver D. Hart
The Bell Journal of Economics
Vol. 11, No. 1 (Spring, 1980), pp. 42-64
Published by: RAND Corporation
DOI: 10.2307/3003400
Stable URL: http://www.jstor.org/stable/3003400
Page Count: 23
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Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation
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Abstract

It is commonly thought that a widely held corporation that is not being run in the interest of its shareholders will be vulnerable to a takeover bid. We show that this is false, since shareholders can free ride on the raider's improvement of the corporation, thereby seriously limiting the raider's profit. We analyze exclusionary devices that can be built into the corporate charter to overcome this free-rider problem. We study privately and socially optimal corporate charters under the alternative assumptions of competition and monopoly in the market for corporate control.

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