Preemptive bidding in takeover auctions with affiliated values

Abstract

► Preemptive bidding reallocate profit from the seller to the first bidder and does not affect the social surplus. ► Higher correlation of bidders’ values leads to higher preemption rate but has ambiguous effect on the size of the preemptive bid. ► In affiliated value auctions jump bidding may results in expropriation of the entire seller's profit by the first bidder. ► Value affiliation positively affects profit expropriation but has ambiguous effect on the seller's expected profit. ► A significant increase in the value affiliation reduces the seller's expected profit. This paper extends Fishman's (1988) model of preemptive bidding in takeover auctions to auctions with affiliated values. It shows that preemptive bidding transfers wealth from the seller to the first bidder without affecting the profit of the second bidder and social welfare. It also shows that higher correlation between bidders’ values leads to higher preemption rates but has an ambiguous effect on the size of the opening bid. Finally, it shows that in auctions with affiliated values, even infinitesimal entry costs may lead to a preemptive jump bidding that allows the reallocation of the entire surplus from the seller to the first bidder.