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The Deterring Role of the Medium of Payment in Takeover Contests: Theory and Evidence from the UK

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  • Philippe Cornu
  • Dušan Isakov*

Abstract

The deterring role of the medium of payment in a takeover contest is analysed from the point of view of the bidder. Cash, debt and equity are considered as alternative mediums of payment, and the bidder equilibrium strategies are specified following the Perfect Bayesian Equilibrium requirements for a signalling game. The model predicts notably that cash offers signal a high‐valuing bidder, strongly determined to acquire the target firm. Moreover, cash offers deter competition better than debt or equity offers. The theoretical results are validated with data from the UK over 1995–96.

Suggested Citation

  • Philippe Cornu & Dušan Isakov*, 2000. "The Deterring Role of the Medium of Payment in Takeover Contests: Theory and Evidence from the UK," European Financial Management, European Financial Management Association, vol. 6(4), pages 423-440, December.
    • Handle: RePEc:bla:eufman:v:6:y:2000:i:4:p:423-440
    DOI: 10.1111/1468-036X.00133
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    Cited by:

    1. de La Bruslerie, Hubert, 2012. "Corporate acquisition process: Is there an optimal cash-equity payment mix?," International Review of Law and Economics, Elsevier, vol. 32(1), pages 83-94.
    2. de La Bruslerie, Hubert, 2013. "Crossing takeover premiums and mix of payment: An empirical test of contractual setting in M&A transactions," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2106-2123.
    3. Fabel, Oliver & Kolmar, Martin, 2002. "Management takeover battles and the role of the golden handshake," Discussion Papers, Series I 319, University of Konstanz, Department of Economics.
    4. Ismail, Ahmad & Krause, Andreas, 2010. "Determinants of the method of payment in mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 471-484, November.

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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