The effect of ownership concentration on deal probability in corporate takeovers : an empirical study of ownership concentration, with new evidence consistent with the free-rider proposition

Abstract

The main purpose of this thesis is to empirically examine the relationship between the target firm’s ownership concentration and deal probability, conditional on a bid having been made. To examine this relationship in a satisfying manner, we apply a traditional prediction model framework with binary outcomes: success or failure. At the same time, we control for some of the most common and proven determinants of deal probability, as well as for different type of owners in the target firm, such as industrial and family owners. In addition, we examine whether there is an interaction effect between bid premium and ownership concentration. With a final sample of 1493 public-to-public takeover bids, covering six continents in the period 2008-2014, we find that an increase in ownership concentration has a positive and significant effect on deal probability in takeovers. Furthermore, we also find that bid premium is a more important determinant of deal probability for low levels of target ownership concentration than for high levels. Apart from industrial owners, ownership types in general are also found to have little impact on deal probability. Our findings are consistent the Free Rider Proposition by Grossman and Hart (1980), as our results show that transfer of control is harder when the target firm’s ownership structure is diffuse. The results are also consistent with the notion that shareholders must be offered a higher premium when concentration is low, in order to induce them to sell their shares and not free-ride. Thus, we expand on the current takeover prediction literature while making an empirical contribution to the field of M&A by utilizing extensive ownership data in new ways.