Asymmetric information and the medium of exchange in takeovers: theory and tests

In a model of takeovers under asymmetric information, we identifya separating equilibrium in which the value of the bidder firmis revealed by the mix of cash and securities used as paymentfor the target. The model predicts that the revealed biddervalue is monotonically increasing and convex in the fractionof the total offer that consists of cash. We examine the modelrestrictions using data from Canada, where mixed offers areboth relatively frequent and free of the confounding tax-relatedoptions characterizing mixed offers in the United States. Wefind that the average announcement-month bidder abnormal returnin mixed offers is large and significant. However, maximum likelihoodestimates of parameters in both linear and nonlinear cross-sectionalregressions fail to support the model predictions.