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Financing bidders in takeover contests

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  • Vladimirov, Vladimir

Abstract

This paper argues that endogenizing how acquirers finance their cash bids is just as important for understanding bidding in takeovers as endogenizing acquirers׳ payment method choice. The paper shows that acquirers finance their cash bids with equity only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. Conversely, acquirers with access to competitive financing use debt and overbid. Endogenizing the payment method reveals that security (e.g., stock) bids carry lower premiums than cash bids, backed by competitive financing. These insights find empirical support and could help explain existing evidence, which contradicts prior theory.

Suggested Citation

  • Vladimirov, Vladimir, 2015. "Financing bidders in takeover contests," Journal of Financial Economics, Elsevier, vol. 117(3), pages 534-557.
  • Handle: RePEc:eee:jfinec:v:117:y:2015:i:3:p:534-557
    DOI: 10.1016/j.jfineco.2015.06.002
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    References listed on IDEAS

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    Cited by:

    1. Mittal, Amit & Garg, Ajay Kumar, 2017. "Private information implications for acquirers and targets in horizontal mergers," MPRA Paper 85355, University Library of Munich, Germany.
    2. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    3. repec:eee:quaeco:v:65:y:2017:i:c:p:227-239 is not listed on IDEAS

    More about this item

    Keywords

    Takeover premiums; Financing bidders; Takeover contests; Financial constraints; Security design;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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