The takeover game

The takeover game is an experimental asset market characterized by three important features: (1) manager-determined dividend payments to shareholders, (2) a takeover offer to shareholders, and (3) a double auction market in which shareholders trade shares. This market mechanism essentially allows shareholders to price their trust in management. Despite the unique subgame perfect equilibrium outcome in which no takeover offer is ever rejected and no dividends are ever paid out, we find that the market often survives takeover offers. Managers pay positive dividends and appear to do so strategically to signal trustworthiness to shareholders, especially in periods in which takeover is to be made. While prices are not directly responsive to dividends, we find that market price is a good predictor of shareholder’s intent to accept takeover offers.