What determines the financing decision in corporate takeovers: Cost of capital,agency problems,or the means of payment? |
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| Authors: | Marina Martynova Luc Renneboog |
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| Institution: | 1. Department of Finance and Center, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands;2. European Corporate Governance Institute (ECGI), UK;3. Cardiff Business School, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK;1. Department of Finance, College of Business Administration, Bowling Green State University, Bowling Green, OH 43403, United States;2. College of Business, University of South Florida Sarasota-Manatee, Sarasota, FL 34243-2025, United States;3. Sogang Business School, Sogang University, Seoul, Republic of Korea;1. Dartmouth College, Tuck School of Business, Hanover, NH 03755, USA;2. Norwegian School of Economics, Helleveien 30, Bergen 5045, Norway;3. European Corporate Governance Institute, c/o the Royal Academies of Belgium, Palace of the Academies, Brussels 1000, Belgium;4. US Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549, USA;5. Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX, UK |
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| Abstract: | How is a takeover bid financed and what is its impact on the expected value creation of the takeover? An analysis of the sources of transaction financing has been largely ignored in the takeover literature. Using a unique dataset, we show that external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are in fact quite distinct. Acquisitions financed with internally generated funds significantly underperform those financed with debt. The takeover financing decision is influenced by the bidder's pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. The choice of equity versus internal cash or debt financing also depends on the bidder's strategic preferences with respect to the means of payment. |
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