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This paper demonstrates that winning a takeover bidding contest can be `bad news' and, consequently, losing can be `good news.' This result is true even when all bidders are acting rationally in their own best interests and have perfect information on their valuations. Bidders with toeholds rationally bid above their private valuations and possibly suffer losses in equilibrium. This equilibrium strategy of `bidding to lose' played by partial owners leads to the `owner's curse.' The paper provides an explanation for acquirer losses without recourse to managerial `hubris' and/or agency problems. The presence of partial owners also has strong implications for the choice of selling mechanisms: firms should not be sold using the first price sealed-bid auction. Additionally the paper shows that the presence of large blockholders acts as a costless defensive measure and predicts that it is less advantageous for firms with large blockholders to enact costly defensive measures. The model gives rise to predictions on (1) the type of acquirers more likely to make losses; (2) the choice of auction procedures; (3) the effect of managerial ownership on firm value; (4) the existence of initial bid premia; and (5) the incentives of firms to engage in share repurchase, private placement and debt-for-equity swaps in the face of a takeover threat
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