We examine the use of breakup fees as a device for target firms to recruit white knights in response to a hostile takeover bid. When bidders have interdependent valuations of the target, the possible use of a breakup fee to subsidize entry of a subsequent bidder overdisciplines the initial...

This paper examines breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contest. We show that, unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure...