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What determines the financing decision in corporate takeovers: Cost of capital, agency problems, or the means of payment?

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  • Martynova, Marina
  • Renneboog, Luc

Abstract

How is a takeover bid financed and what is its impact on the expected value creation of the takeover? An analysis of the sources of transaction financing has been largely ignored in the takeover literature. Using a unique dataset, we show that external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are in fact quite distinct. Acquisitions financed with internally generated funds significantly underperform those financed with debt. The takeover financing decision is influenced by the bidder's pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. The choice of equity versus internal cash or debt financing also depends on the bidder's strategic preferences with respect to the means of payment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 15 (2009)
Issue (Month): 3 (June)
Pages: 290-315

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Handle: RePEc:eee:corfin:v:15:y:2009:i:3:p:290-315

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Web page: http://www.elsevier.com/locate/jcorpfin

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Keywords: Mergers and acquisitions Takeovers Means of payment Financing decision Cost of capital Sources of financing Agency problem Pecking order Corporate governance regulation Nested logit;

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Citations

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Cited by:
  1. de La Bruslerie, Hubert, 2012. "Corporate acquisition process: Is there an optimal cash-equity payment mix?," Economics Papers from University Paris Dauphine 123456789/5066, Paris Dauphine University.
  2. Ang, James S. & Ҫolak, Gӧnül & Zhang, Tai-Wei, 2014. "Decoupling by clienteles and by time in the financial markets: The case of two-stage stock-financed mergers," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 360-375.
  3. 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.
  4. Gregory, Alan & O'Donohoe, Sheila, 2014. "Do cross border and domestic acquisitions differ? Evidence from the acquisition of UK targets," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 61-69.
  5. Clerc, Christophe & Demarigny, Fabrice & Valiante, Diego & de Manuel, Mirzha, 2012. "A Legal and Economic Assessment of European Takeover Regulation," CEPS Papers 7525, Centre for European Policy Studies.
  6. 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.
  7. Kien Cao & Jeff Madura, 2011. "Determinants of the Method of Payment in Asset Sell‐Off Transactions," The Financial Review, Eastern Finance Association, vol. 46(4), pages 643-670, November.
  8. Yasmeen Akhtar & Attiya Yasmin Javid & Tariq Abbasi, 2014. "What Determines Payment Methods and Deal Amount in Corporate Merger and Acquisitions in Pakistan," PIDE-Working Papers 2014:97, Pakistan Institute of Development Economics.
  9. Salim Chahine & Mohamad Zeidan, 2014. "Corporate governance and market performance of parent firms following equity carve-out announcements," Journal of Management and Governance, Springer, vol. 18(2), pages 471-503, May.
  10. Mike Burkart & Samuel Lee, 2010. "Signaling in Tender Offer Games," FMG Discussion Papers dp655, Financial Markets Group.
  11. Hubert De La Bruslerie, 2012. "Corporate acquisistion process: is there an optimal cash-equity payment mix?," Post-Print halshs-00636349, HAL.
  12. de La Bruslerie, Hubert, 2012. "Crossing takeover premiums and mix of payment: An empirical test of contractual setting in M&A transactions," Economics Papers from University Paris Dauphine 123456789/9668, Paris Dauphine University.
  13. Belot, François, 2010. "Excess control rights and corporate acquisitions," Economics Papers from University Paris Dauphine 123456789/5922, Paris Dauphine University.
  14. Renneboog, L.D.R. & Zhao, Y., 2013. "Director Networks and Takeovers," Discussion Paper 2013-056, Tilburg University, Center for Economic Research.
  15. Di Giuli, Alberta, 2013. "The effect of stock misvaluation and investment opportunities on the method of payment in mergers," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 196-215.

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