In this paper, a general model of strategic behaviour of (regulated and non-regulated) firms in M&A is presented. For non-regulated firms, the model indicates that targeted firms issue new debt strategically. In this case, the firm's capital structure is chosen so that it maximizes the (ex-ante) market value of the firm. However, the focus of the paper is on regulated firms (mostly monopolies). For these firms, the model shows that managers, acting on behalf of shareholders, make their strategic decisions on debt issuing and investment, in anticipation of both the decisions of the regulatory body and the responses of financial markets. These decisions are aimed at influencing the probability that an acquisition occurs as well as the price the potential bidder will have to pay. However, such decisions are also made with a view to influencing the regulatory policies (maximum price or rate of return permitted), thereby mitigating the probability that, in the regulatory game, the regulator adopts an opportunistic behaviour. Application of these results to some real-world situations (such as regulated public utilities´companies) is straighforward.
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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CETE Discussion Papers with number
0307.
Find related papers by JEL classification: G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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