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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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Author Info
Martynova, M.
Renneboog, L.D.R. (Tilburg University, Tilburg Law and Economics Center)

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Abstract

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 depends on the bidder's strategic preferences with respect to the means of payment. 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 JEL Classifications: G34

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Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2008-028.

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Date of creation: 2008
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Handle: RePEc:dgr:kubtil:2008028

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