That is, in most cases, the incentive to tip decreases with increases in the bidder's toehold.
The incentive for bidders to tip arbitrageurs depends on the amount of dilution the legal system will allow, the increase in the back-end price that occurs due to pre-announcement informed trading, the private tendering costs of the share that grants a controlling interest, and the size of the bidder's toehold. These factors create several testable empirical implications.
Finally, in most cases, the incentive to tip investors with low private costs of tendering increases with decreases in the bidder's toehold. As a result, one would expect more tipping to occur after the 1968 enactment of the Williams Act, which imposed limits on the size of the toehold a bidder may acquire before revealing its intentions to the public.
3 In theoretical models developed by Chowdhry and Jegadeesh (1994) and Hirshleifer and Titman (1990), the probability of success of a tender offer is positively related to a bidder's toehold. Walkling (1985) presents empirical evidence consistent with this hypothesis.
8 Note that for some targets, [t.sub.i] could equal zero for some (or all) of the shares not in the bidder's toehold. Here, [t.sub.i], i = [Alpha]N + 1, ..., N, is assumed to be greater than zero to illustrate the advantages of informing arbitrageurs.
11 This analysis is at variance with an argument by Stulz, Walkling, and Song (1990) that increases in the bidder's toehold or increases in institutional ownership always cause the reservation price of the pivotal share to decline.