Abstract

While many studies research on the bidding contest, several studies have assessed the impact of the white knight's bid on common stock returns. However, these studies focus on the reaction of the market to a single decision. In this paper, we are interested in both the short-run effect of management's decision to make a white-knight bid and the long-term cumulative effect made by management. As the first paper to research on the motivation of the white knight and on the factors that affect its market reaction, we place the white knight's decision to enter the control contest in a broad context. Our hypothesis is that poor governance mechanisms and ownership structure may lead to both poor management and thus a decision to join the bidding contest with an overpaid price. We employ a unique hand-collected dataset on firm characteristics, governance mechanisms and ownership structure for the bidding pairs with white knights. Our results show that board size, tenure average, the ownership held by directors and executives as a group and institutional ownership have an important effect on abnormal returns. However, we find no significant effect of financial strength and ownership structure on the likelihood of a white knight takeover attempt. Instead, we find that striving for the market power in its industry is an important motivation for a white knight attempt.