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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, M.
  • Renneboog, L.D.R.

    (Tilburg University, Center for Economic Research)

Abstract

While the means of payment in takeovers has been a focal point in the takeover literature, what has largely been ignored is the analysis of how the takeover bid is financed and what its impact is on the expected value creation of the takeover. This paper investigates the sources of transaction financing in European corporate takeovers launched during the period 1993- 2001 (the fifth takeover wave). Using a unique dataset, we show that the 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 quite distinct. For instance, a significantly negative price revision following the announcement of a takeover is not unique to the equity-paid M&As; it is also observed in any other deals that involve equity financing (including cash-paid and mixed-paid M&As). Also, acquisitions financed with internally generated funds significantly underperform those financed with debt. Our multinomial logit and nested logit analyses show that 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. There is also evidence that the choice of equity versus internal cash or debt financing is influenced by the bidder’s strategic preferences with respect to the means of payment. We find no evidence of financing decisions driven by agency conflicts between managers and shareholders or between shareholders and creditors.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-66.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200866

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Keywords: mergers and acquisitions; takeovers; means of payment; financing decision; cost of capital; 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, 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.
  2. Renneboog, L.D.R. & Zhao, Y., 2013. "Director Networks and Takeovers," Discussion Paper 2013-056, Tilburg University, Center for Economic Research.
  3. 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.
  4. 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.
  5. 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.
  6. Hubert De La Bruslerie, 2012. "Corporate acquisistion process: is there an optimal cash-equity payment mix?," Post-Print halshs-00636349, HAL.
  7. 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.
  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. Mike Burkart & Samuel Lee, 2010. "Signaling in Tender Offer Games," FMG Discussion Papers dp655, Financial Markets Group.
  10. 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.
  11. 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.
  12. Belot, François, 2010. "Excess control rights and corporate acquisitions," Economics Papers from University Paris Dauphine 123456789/5922, Paris Dauphine University.

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