The Social Value of Debt in the Market for Corporate Control
The free-rider problem in takeovers is in essence a (coordination) failure to "negotiate" mutually beneficial terms. Means for bidders to unilaterally seize gains could solve this issue but target shareholders prefer to limit such means. We show that takeover debt can bridge this divide in that debt constraints can serve as Pareto-improving ``sharing rules." In this theory (i) leveraged buyouts are privately and socially optimal and (ii) competing bidders raise more debt, amplifying gains to target shareholders and in takeover efficiency. At its best, leveraging bids neutralizes the free-rider problem---to mutual benefit.