TO THE RAIDER GOES THE SURPLUS? A REEXAMINATION OF THE FREE-RIDER PROBLEM

This paper reexamines Grossman and Hart's ( 1980) insight into how the free-rider problem excludes an external raider from capturing the increase in value it brings to a firm The inability of the raider to capture any of the surplus depends critically on the assumption of equal and indivisible shareholdings-the one-share-per-skareholder model In contrast, we show that once shareholdings are large and potentially unequal, a raider may capture a significant part of the increase in value Specifically, the free-rider problem does not prevent the takeover process when shareholdings are divisible