The source of financing in mergers and acquisitions

I directly focus on the source of financing in takeovers instead of the common but indirect approximation by the payment method. By examining a sample of 610 acquisitions occurring between 1991 and 2009, I am able to distinguish between several different sources of financing for sizeable transactions and to additionally control for any payment effect. For the initial decision if the takeover should be financed with internal funds, the completion time and the acquirer's pre-takeover characteristics (cash level, Tobin's Q, and leverage) are crucial. When deciding the source of external funds, the acquirer's pre-takeover cash level remains important, while the target's characteristics (nationality, listing, and competing bids) gain importance. For acquisitions that are more credit-financed, I find superior short-run performance; takeovers financed mainly with common stock issues yield poor announcement returns. Over the 3 years following an acquisition, my analysis reveals that capital markets efficiently price all information at the announcement; only takeovers financed with a common stock issue significantly underperform in subsequent years.