Mandatory Bids in China: You Can Lead a Horse to Water, But You Can't Make Him Drink

Abstract

This paper studies mandatory bids in China against an institutional backdrop of restrictive IPO requisites. We find that virtually no shares held by external shareholders are tendered in mandatory bids for all the remaining shares. Mandatory bidders’ tactics to avoid tendering by public investors include pressing down their bid prices, and potential manipulation of target stock prices. In relation to economic impacts of mandatory bids, we document that market responds favorably to their announcements, and that targets’ operational performance improves in their wake, consistent with the theoretical prediction that mandatory bids induce efficient transfers of corporate control. Our research is among the earliest empirical works on the mandatory bid rule in a particular jurisdiction. It not only yields interesting results pertaining to the unique Chinese regulatory environment, but also generates useful insights about mandatory bids beyond China.