THE EFFECTS OF OVERPAYMENT AND FORM OF FINANCING ON BIDDER RETURNS IN MERGERS AND TENDER OFFERS

In this paper I examine the effects of overpayment and form of financing on bidding firms' stock returns and the determinants of the form of financing in mergers and tender offers. First, I find that in the 1980s potential overpayments to target shareholders and the form of financing are important for explaining cross-sectional differences in bidding firms' returns upon the announcement of mergers or tender offers. Second, I find that in the 1980s cash offers were likely to be chosen by cash-rich firms relative to their industry, and stock exchange offers were likely to be chosen by normal cash-generating firms relative to their industry. The latter finding is consistent with the pecking order hypothesis and casts doubt on recent signaling explanations of the form of financing.