Financing decisions and bidder gains

This paper analyzes the relation between bidder gains and the source of financing funds available. We document that after controlling for the form of payment, financing decisions during the year before a takeover play an important role in explaining the cross section of bidder gains. Bidder announcement period abnormal returns are positively and significantly related to the amount of ex ante equity financing. This relation is particularly strong for high q firms. We further report a negative and significant relation between bidder gains and free cash flow. This relation is particularly strong for firms classified as having poor investment opportunities. The amount of debt financing before a takeover announcement is not significantly related to bidder gains. Together, we take these findings as supportive of the pecking-order theory of financing and the free cash flow hypothesis.