The Optimal Selling Mechanism in the Takeover Market

Project: Research

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The question of how to sell a firm is typically framed as auctions versus negotiations. In practice,  both auctions and negotiations are commonly used to sell firms. In this project, I propose a model in which both methods can arise as an optimal mechanism. An important aspect that I explicitly model is costly information acquisition by buyers. In the sale of a firm or other financial or business assets, buyers perform due diligence to investigate the quality and compatibility of the assets before submitting offers. Moreover, it is costly to acquire information. The legal and accounting costs of performing due diligence often amount to millions of dollars. Second, I allow buyers to have interdependent valuations, i.e., one buyer's valuation for an asset can depend on other buyers' private information.  For example, the value of an asset depends on future states of the world such as demand shift, technology progress, and economic growth, which buyers have different information about. Then, the information possessed by other buyers, if known to a particular buyer, may affect his valuation. This is even more pronounced in the presence of financial buyers such as private equity firms and venture capital firms who make investments in companies and realize a return on their investments by selling the companies in the future. In this project, I propose a model that incorporates the above two aspects. As a preliminary analysis, I characterize the optimal selling mechanism for sufficiently high interdependency. If the information cost is high, then the seller first negotiates with one buyer who becomes informed and approaches other buyers only when the informed buyer's bid is below her reserve price. If the information cost is low, then the seller first holds an auction with multiple informed participants and approaches other buyers only when the highest hid is below her reserve price. Going forward, I will first investigate whether the above result continues to hold for low interdependency. Second, I will study the optimal selling mechanism if the buyers can randomize over their information choices. Lastly, I plan to examine the implication of my theoretical findings in takeover auctions from an empirical perspective. 


Project number9043239
Grant typeGRF
Effective start/end date1/01/22 → …