Takeovers and the Dynamics of Information Flows

This paper analyzes the effect of a possible takeover on information flows and on the terms of trade in business relationships. We consider a long-term relationship between a firm and a privately informed stakeholder, say a buyer. In our model, takeovers both increase the surplus from trade and enable the firm to extract a potentially higher share of the surplus from the buyer. The possibility of a takeover that leaves the buyer with a higher (resp. lower) rent than the incumbent manager increases (resp. decreases) the buyer's willingness to reveal his valuation. We suggest a number of testable predictions on the performance of takeover targets and trade credit