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: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)290-315
JournalJournal of Corporate Finance
Volume15
Issue number3
Publication statusPublished - 2009

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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

Cite this

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title = "What determines the financing decision in corporate takeovers: Cost of capital, agency problems, or the means of payment?",
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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What determines the financing decision in corporate takeovers : Cost of capital, agency problems, or the means of payment? / Martynova, M.; Renneboog, L.D.R.

In: Journal of Corporate Finance, Vol. 15, No. 3, 2009, p. 290-315.

Research output: Contribution to journalArticleScientificpeer-review

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