What Determines the Financing Decision in Corporate Takeovers: Cost of Capital, Agency Problems, or the Means of Payment?

M. Martynova, L.D.R. Renneboog

Research output: Working paperDiscussion paperOther research output

Abstract

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 depends on the bidder's strategic preferences with respect to the means of payment.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Volume2008-028
Publication statusPublished - 2008

Publication series

NameTILEC Discussion Paper
Volume2008-028

Fingerprint

Cost of capital
Payment
Financing decisions
Agency problems
Corporate takeovers
Cash
Debt financing
Equity
Governance environment
Financing
Corporate governance
Takeover bids
Value creation
Debt
Expected value
Equity financing
Funding
Costs

Keywords

  • mergers and acquisitions
  • takeovers
  • means of payment
  • financing decision
  • cost of capital
  • sources of financing
  • agency problem
  • pecking order
  • corporate governance regulation
  • nested logit

Cite this

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What Determines the Financing Decision in Corporate Takeovers : Cost of Capital, Agency Problems, or the Means of Payment? / Martynova, M.; Renneboog, L.D.R.

Tilburg : TILEC, 2008. (TILEC Discussion Paper; Vol. 2008-028).

Research output: Working paperDiscussion paperOther research output

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KW - mergers and acquisitions

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KW - pecking order

KW - corporate governance regulation

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