Abstract
Despite their claimed advantages, toehold strategies are rarely used in recent corporate takeovers and do not seem to increase acquirer returns. Are toeholds becoming obsolete because of their apparent ineffectiveness? We show that the answer is no. We find that toeholds are preferred for executing difficult takeovers. After controlling for such endogeneity in toehold-based acquisitions, toeholds do increase returns to acquirers. Moreover, the performance of toehold strategies improves over time due to more selective and more effective acquisition of toeholds. We find that this time trend is in part explained by learning-by-doing. Acquirers learn from their previous toehold experience to be more selective with respect to the circumstances when to execute a toehold strategy and then choose a more effective toehold size.
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