We explore experimentally whether the free-rider problem occurs in corporate takeovers. While Grossman and Hart’s (1980) classical proposition states that takeovers never succeed due to the free-rider problem, we observe a considerable number of successful takeovers in the real capital markets. To solve this paradox, we conducted an experimental study by constructing the simple laboratory markets of atomistic shareholders. We found the following. First, free-rider problems do occur in our laboratory; only 20% of takeovers are successful and consequently 80% of social values disappear. Second, a bidder’s initial shareholdings significantly mitigate the free-rider problem; the probability of takeover success rises to 71.3% when a bidder initially holds the shares of the target firm. From these experimental results, we consider that the free-rider problem potentially exists in the real takeover markets as well, and that the bidder’s initial shareholdings may be one explanation for successful takeovers in reality.

Co-authors Tatsuyoshi Saijo, Yasuyo Hamaguchi, Toshiji Kawagoe