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Targeting Capital Structure: The Relationship between Risky Debt and the Firm's Likelihood of Being Acquired

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  • Billett, Matthew T
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    Abstract

    In a takeover, wealth transfers from bidder and target equityholders to target debtholders can occur if target debt is coinsured by either the bidder's assets or by the synergy itself. Such wealth transfers reduce bidder and target shareholder gains and could poison the acquisition. With a sample from 1979-90, the author finds that, as the coinsurance potential of a firm's debt--measured as the amount of relatively risky debt outstanding--increases, its likelihood of being acquired decreases. In particular, he finds this coinsurance deterrent to be strongest during the 1985-90 period and strongest for firms with public debt outstanding. Copyright 1996 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 69 (1996)
    Issue (Month): 2 (April)
    Pages: 173-92

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    Handle: RePEc:ucp:jnlbus:v:69:y:1996:i:2:p:173-92

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Mueller, Holger M & Panunzi, Fausto, 2003. "Tender Offers and Leverage," CEPR Discussion Papers 3964, C.E.P.R. Discussion Papers.
    2. Bhabra, Gurmeet Singh, 2007. "Insider ownership and firm value in New Zealand," Journal of Multinational Financial Management, Elsevier, vol. 17(2), pages 142-154, April.
    3. Jandik, Tomas & Makhija, Anil K., 2005. "The Impact of the Structure of Debt on Target Gains," Working Paper Series 2005-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    4. Wald, John K. & Long, Michael S., 2007. "The effect of state laws on capital structure," Journal of Financial Economics, Elsevier, vol. 83(2), pages 297-319, February.
    5. North, David S., 2001. "The role of managerial incentives in corporate acquisitions: the 1990s evidence," Journal of Corporate Finance, Elsevier, vol. 7(2), pages 125-149, June.
    6. Joseph P. Hughes & Choon-Geol Moon & William W. Lang & Michael S. Pagano, 2001. "Managerial Incentives and the Efficiency of Capital Structure," Departmental Working Papers 200102, Rutgers University, Department of Economics.
    7. Vijh, Anand M. & Yang, Ke, 2013. "Are small firms less vulnerable to overpriced stock offers?," Journal of Financial Economics, Elsevier, vol. 110(1), pages 61-86.
    8. Jandik, Tomas & Makhija, Anil K., 2005. "Debt, debt structure and corporate performance after unsuccessful takeovers: evidence from targets that remain independent," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 882-914, October.
    9. Jandik, Tomas & Makhija, Anil K., 2004. "Debt, Debt Structure and Corporate Performance after Unsuccessful Takeovers: Evidence from Targets that Remain Independent," Working Paper Series 2005-6, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    10. Joseph P. Hughes & William W. Lang & Choon-Geol Moon & Michael S. Pagano, 2004. "Managerial Incentives and the Efficiency of Capital Structure in U.S. Commercial Banking," Departmental Working Papers 200401, Rutgers University, Department of Economics.

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