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

42 Pages Posted: 4 Aug 2008 Last revised: 21 Apr 2009

See all articles by Marina Martynova

Marina Martynova

U.S. Securities and Exchange Commission

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

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.

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

JEL Classification: G34

Suggested Citation

Martynova, Marina and Renneboog, Luc, What Determines the Financing Decision in Corporate Takeovers: Cost of Capital, Agency Problems, or the Means of Payment?. Journal of Corporate Finance, Forthcoming, ECGI - Finance Working Paper No. 215/2008 , CentER Discussion Paper Series No. 2008-66, TILEC Discussion Paper No. 2008-028, Available at SSRN: https://ssrn.com/abstract=1192566

Marina Martynova (Contact Author)

U.S. Securities and Exchange Commission ( email )

100 F St. NE
Washington, DC 20549
United States

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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