Competition and the medium of exchange in takeovers

The role of the medium of exchange in competition among biddersand its effect on returns to stockholders in corporate takeoversare investigated. Consistent with recent empirical evidence,our model shows that stockholders of both acquiring and targetfirms obtain higher returns when a takeover is financed withcash rather than equity, and that returns to target shareholdersincrease with competition. The model predicts that the factionof synergy captured by the target decreases with the level ofsynergy. Finally, it is shown that, as competition increases,the case component of the offer as well as the proportion ofcase offered increases.