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Noise Trading and Takeovers

Author

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  • Albert S. Kyle
  • Jean-Luc Vila
Abstract
A model of takeovers is investigated in which "noise trading" provides camouflage that makes it possible for a large corporate outsider to purchase enough shares at favorable prices so that takeovers become profitable. Although the model accommodates the possibility of dilution (Grossman and Hart, 1980) and a large incumbent shareholder (Shleifer and Vishny, 1986), neither dilution nor a large incumbent shareholder is necessary for costly takeovers to be profitable. Noise trading tends to encourage costly takeovers that otherwise would not occur and to discourage beneficial takeovers that otherwise would occur.

Suggested Citation

  • Albert S. Kyle & Jean-Luc Vila, 1991. "Noise Trading and Takeovers," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 54-71, Spring.
    • Handle: RePEc:rje:randje:v:22:y:1991:i:spring:p:54-71
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