(Ir)responsible Takeovers

We analyze takeover efficiency when socially conscious acquirers and target shareholders respond to externalities. Despite the Grossman-Hart ``holdout'' problem and free-riding in externality production, takeovers are socially efficient when target shareholders are consequentialist and acquirers are purely profit-driven. More generally, we identify a balanced-preferences condition under which externalities are fully internalized. Both increases and decreases in the strength of externality-preferences disrupt this balance and lead to inefficiency.  We apply our framework to pre-takeover trading dynamics, exchange offers, leveraged buyouts, minority shareholder protections, and the strategic use of social responsibility as both a takeover defense and a bidding tactic.