IDEAS home Printed from https://ideas.repec.org/a/eee/irlaec/v66y2021ics0144818821000107.html
   My bibliography  Save this article

Capital structure and the optimal payment methods in acquisitions

Author

Listed:
  • Attaoui, Sami
  • Cao, Wenbin
  • Six, Pierre

Abstract

Based on a trade-off model of capital structure with immediate liquidation, and infinite debt maturity, we analyze the impact of prior-to-acquisition leverage levels on the optimal payment method used in an acquisition. Consistent with existing empirical studies, our model optimally yields three payment methods: Full cash, full equity, and a mix of cash and equity. The optimal level of cash in the transaction stems from the interplay between the magnitude of leverage deficit of one or both firms and the scale of synergies, in particular financial, that can be reaped from the acquisition. Finally, we emphasize the key role played by the capital structure of the target firm.

Suggested Citation

  • Attaoui, Sami & Cao, Wenbin & Six, Pierre, 2021. "Capital structure and the optimal payment methods in acquisitions," International Review of Law and Economics, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:irlaec:v:66:y:2021:i:c:s0144818821000107
    DOI: 10.1016/j.irle.2021.105986
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0144818821000107
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irle.2021.105986?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mara Faccio & Ronald W. Masulis, 2005. "The Choice of Payment Method in European Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(3), pages 1345-1388, June.
    2. Isil Erel & Yeejin Jang & Michael S. Weisbach, 2015. "Do Acquisitions Relieve Target Firms’ Financial Constraints?," Journal of Finance, American Finance Association, vol. 70(1), pages 289-328, February.
    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. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    5. Benjamin C. Ayers & Craig E. Lefanowicz & John R. Robinson, 2003. "Shareholder Taxes in Acquisition Premiums: The Effect of Capital Gains Taxation," Journal of Finance, American Finance Association, vol. 58(6), pages 2783-2801, December.
    6. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    7. Sreedhar T. Bharath & Amy K. Dittmar, 2010. "Why Do Firms Use Private Equity to Opt Out of Public Markets?," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1771-1818.
    8. Cepec, Jaka & Grajzl, Peter, 2020. "Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival," International Review of Law and Economics, Elsevier, vol. 61(C).
    9. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, vol. 44(1), pages 41-57, March.
    10. Martynova, Marina & Renneboog, Luc, 2009. "What determines the financing decision in corporate takeovers: Cost of capital, agency problems, or the means of payment?," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 290-315, June.
    11. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    13. Fu, Fangjian & Lin, Leming & Officer, Micah S., 2013. "Acquisitions driven by stock overvaluation: Are they good deals?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 24-39.
    14. Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 77(3), pages 649-672, September.
    15. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
    16. Dirk Hackbarth & Christopher A. Hennessy & Hayne E. Leland, 2007. "Can the Trade-off Theory Explain Debt Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1389-1428, 2007 04.
    17. Bruyland, Evy & Lasfer, Meziane & De Maeseneire, Wouter & Song, Wei, 2019. "The performance of acquisitions by high default risk bidders," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 37-58.
    18. Amihud, Yakov & Lev, Baruch & Travlos, Nickolaos G, 1990. "Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions," Journal of Finance, American Finance Association, vol. 45(2), pages 603-616, June.
    19. Fan, Hua & Sundaresan, Suresh M, 2000. "Debt Valuation, Renegotiation, and Optimal Dividend Policy," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1057-1099.
    20. Charléty, Patricia & Fagart, Marie-Cécile & Souam, Saïd, 2019. "Quorum rules and shareholder voting," International Review of Law and Economics, Elsevier, vol. 60(C).
    21. Alexander S Gorbenko & Andrey Malenko, 2018. "The Timing and Method of Payment in Mergers when Acquirers Are Financially Constrained," The Review of Financial Studies, Society for Financial Studies, vol. 31(10), pages 3937-3978.
    22. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 474-493.
    23. Eckbo, B. Espen & Makaew, Tanakorn & Thorburn, Karin S., 2018. "Are stock-financed takeovers opportunistic?," Journal of Financial Economics, Elsevier, vol. 128(3), pages 443-465.
    24. Harford, Jarrad & Klasa, Sandy & Walcott, Nathan, 2009. "Do firms have leverage targets? Evidence from acquisitions," Journal of Financial Economics, Elsevier, vol. 93(1), pages 1-14, July.
    25. Sergei A. Davydenko & Ilya A. Strebulaev & Xiaofei Zhao, 2012. "A Market-Based Study of the Cost of Default," The Review of Financial Studies, Society for Financial Studies, vol. 25(10), pages 2959-2999.
    26. repec:dau:papers:123456789/5066 is not listed on IDEAS
    27. Hayne E. Leland, 2007. "Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance," Journal of Finance, American Finance Association, vol. 62(2), pages 765-807, April.
    28. Hansen, Robert G, 1987. "A Theory for the Choice of Exchange Medium in Mergers and Acquisitions," The Journal of Business, University of Chicago Press, vol. 60(1), pages 75-95, January.
    29. Strebulaev, Ilya A. & Yang, Baozhong, 2013. "The mystery of zero-leverage firms," Journal of Financial Economics, Elsevier, vol. 109(1), pages 1-23.
    30. Houston, Joel F & Ryngaert, Michael D, 1997. "Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers," Journal of Finance, American Finance Association, vol. 52(1), pages 197-219, March.
    31. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    32. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
    33. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    34. Martin, Kenneth J, 1996. "The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership," Journal of Finance, American Finance Association, vol. 51(4), pages 1227-1246, September.
    35. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 841-882.
    36. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
    37. Brown, David T & Ryngaert, Michael D, 1991. "The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information," Journal of Finance, American Finance Association, vol. 46(2), pages 653-669, June.
    38. Agliardi, Elettra & Amel-Zadeh, Amir & Koussis, Nicos, 2016. "Leverage changes and growth options in mergers and acquisitions," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 37-58.
    39. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-675.
    40. Schaefer, Stephen M. & Strebulaev, Ilya A., 2008. "Structural models of credit risk are useful: Evidence from hedge ratios on corporate bonds," Journal of Financial Economics, Elsevier, vol. 90(1), pages 1-19, October.
    41. Ann†Kristin Achleitner & André Betzer & Marc Goergen & Bastian Hinterramskogler, 2013. "Private Equity Acquisitions of Continental European Firms: the Impact of Ownership and Control on the Likelihood of Being Taken Private," European Financial Management, European Financial Management Association, vol. 19(1), pages 72-107, January.
    42. Arthur Korteweg, 2010. "The Net Benefits to Leverage," Journal of Finance, American Finance Association, vol. 65(6), pages 2137-2170, December.
    43. Graham, John R. & Leary, Mark T. & Roberts, Michael R., 2015. "A century of capital structure: The leveraging of corporate America," Journal of Financial Economics, Elsevier, vol. 118(3), pages 658-683.
    44. Eric de Bodt & Jean-Gabriel Cousin & Richard Roll, 2018. "Full-Stock-Payment Marginalization in Merger and Acquisition Transactions," Management Science, INFORMS, vol. 64(2), pages 760-783, February.
    45. Steen Thomsen & Frederik Vinten, 2014. "Delistings and the costs of governance: a study of European stock exchanges 1996–2004," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(3), pages 793-833, August.
    46. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    47. DeAngelo, Harry & DeAngelo, Linda & Whited, Toni M., 2011. "Capital structure dynamics and transitory debt," Journal of Financial Economics, Elsevier, vol. 99(2), pages 235-261, February.
    48. Micah S. Officer, 2004. "Collars and Renegotiation in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 59(6), pages 2719-2743, December.
    49. Berkovitch, Elazar & Narayanan, M P, 1990. "Competition and the Medium of Exchange in Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 153-174.
    50. David J. Denis & Stephen B. McKeon, 2012. "Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1897-1929.
    51. Jarrad Harford, 1999. "Corporate Cash Reserves and Acquisitions," Journal of Finance, American Finance Association, vol. 54(6), pages 1969-1997, December.
    52. Akhigbe, Aigbe & Martin, Anna D. & Whyte, Ann Marie, 2007. "Partial acquisitions, the acquisition probability hypothesis, and the abnormal returns to partial targets," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3080-3101, October.
    53. Erickson, M, 1998. "The effect of taxes on the structure of corporate acquisitions," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 279-298.
    54. Ettore Croci & Alfonso Del Giudice, 2014. "Delistings, Controlling Shareholders and Firm Performance in Europe," European Financial Management, European Financial Management Association, vol. 20(2), pages 374-405, March.
    55. James, Christopher, 1995. "When Do Banks Take Equity in Debt Restructurings?," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1209-1234.
    56. Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, vol. 59(6), pages 2685-2718, December.
    57. Deen Kemsley & Doron Nissim, 2002. "Valuation of the Debt Tax Shield," Journal of Finance, American Finance Association, vol. 57(5), pages 2045-2073, October.
    58. Uysal, Vahap B., 2011. "Deviation from the target capital structure and acquisition choices," Journal of Financial Economics, Elsevier, vol. 102(3), pages 602-620.
    59. Pinkowitz, Lee & Sturgess, Jason & Williamson, Rohan, 2013. "Do cash stockpiles fuel cash acquisitions?," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 128-149.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dutordoir, Marie & Strong, Norman C. & Sun, Ping, 2022. "Does short-selling potential influence merger and acquisition payment choice?," Journal of Financial Economics, Elsevier, vol. 144(3), pages 761-779.
    2. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.
    3. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 474-493.
    4. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    5. Eckbo, B. Espen & Makaew, Tanakorn & Thorburn, Karin S., 2018. "Are stock-financed takeovers opportunistic?," Journal of Financial Economics, Elsevier, vol. 128(3), pages 443-465.
    6. Michael Klitzka & Jianan He & Dirk Schiereck, 2022. "The rationality of M&A targets in the choice of payment methods," Review of Managerial Science, Springer, vol. 16(4), pages 933-967, May.
    7. de Bodt, Eric & Cousin, Jean-Gabriel & Officer, Micah S., 2022. "Financial constraints, ownership dilution, and the method of payment in M&A transactions," Journal of Corporate Finance, Elsevier, vol. 75(C).
    8. Boone, Audra L. & Lie, Erik & Liu, Yixin, 2014. "Time trends and determinants of the method of payment in M&As," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 296-304.
    9. Alexandridis, George & Chen, Zhong & Zeng, Yeqin, 2021. "Financial hedging and corporate investment," Journal of Corporate Finance, Elsevier, vol. 67(C).
    10. 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.
    11. Hasan, Iftekhar & Huang, He & To, Thomas Y., 2021. "Are credit rating disagreements priced in the M&A market?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    12. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    13. Fischer, Mario, 2017. "The source of financing in mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 227-239.
    14. 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.
    15. Gabriel J. Power & Neelam Rani & Anandadeep Mandal, 2022. "Corporate control and the choice of investment financing: the case of corporate acquisitions in India," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 41-68, January.
    16. 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.
    17. 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.
    18. Mussa Hussaini & Ugo Rigoni & Paolo Perego, 2023. "The strategic choice of payment method in takeovers: The role of environmental, social and governance performance," Business Strategy and the Environment, Wiley Blackwell, vol. 32(1), pages 200-219, January.
    19. Martynova, Marina & Renneboog, Luc, 2009. "What determines the financing decision in corporate takeovers: Cost of capital, agency problems, or the means of payment?," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 290-315, June.
    20. Chemmanur, Thomas J. & Paeglis, Imants & Simonyan, Karen, 2009. "The medium of exchange in acquisitions: Does the private information of both acquirer and target matter?," Journal of Corporate Finance, Elsevier, vol. 15(5), pages 523-542, December.

    More about this item

    Keywords

    Leverage deficit; Default; Acquisition; Means of payment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:irlaec:v:66:y:2021:i:c:s0144818821000107. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/irle .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.