Financial Constraints and the Method of Payment in Mergers and Acquisitions
41 Pages Posted: 21 Mar 2009 Last revised: 27 Feb 2011
Date Written: February 25, 2011
Abstract
Financially constrained bidders are more likely to use stock in acquisitions and are significantly more sensitive to stock valuations and growth opportunities in their method of payment decisions than are unconstrained bidders. Furthermore, in stock-swap transactions, constrained acquirers with high stock valuation offer higher acquisition premiums and capture smaller shares of acquisition gains than low valuation acquirers. The findings indicate that financing frictions affect payment method and are not alleviated in acquisitions. Moreover, the pecking order of capital structure is violated for constrained firms, as they save internal resources to reduce their future financing uncertainty and maintain financial flexibility.
Keywords: Financial constraints; cash holdings; financial flexibility; corporate control transactions; mergers; acquisitions; method of payment
JEL Classification: G31, G34
Suggested Citation: Suggested Citation
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