Takeovers and Equity Derivatives

Abstract

This paper examines the use of equity derivatives in takeovers. The equilibrium model developed here shows that allowing the bidder to purchase equity derivatives on the target prior to the announcement of a takeover bid unequivocally increases the bid's probability, of success. The resulting propositions have major implications for takeover regulation, economic efficiency, and general social welfare, as the benefits of regulating the use of equity derivatives in acquisitions may not exceed the costs.