Debt, Information Acquisition, and the Takeover Threat
AbstractIn this paper we formalize the information acquisition process by a potential bidder and its relationship with the target firm's capital structure. We show that debt increases prior to an acquisition are negatively related to the precision of the bidder's information. Incumbent managers, by means of leverage, offset shareholders' losses derived from information acquisition about the firm's prospects by potential acquirors. This explanation for the use of capital structure to deter rivals for control complements the ones provided by the literature. We test our model with a sample of 739 U.S. targets of hostile tender offers, and show that informational variables (such as toehold size and nature of target and bidder industries) are significant determinants of the decision to adjust leverage. The paper shows that target firms display slightly higher debt levels than their industry peers, and that target firms significantly reduce leverage in the year prior to the tender offer announcement. The latter result indicates t
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm110.
Date of creation: 01 Jan 1999
Date of revision: 01 Aug 2000
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- Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
- Dennis, Debra K. & McConnell, John J., 1986. "Corporate mergers and security returns," Journal of Financial Economics, Elsevier, vol. 16(2), pages 143-187, June.
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