TY - JOUR
T1 - Financing and takeovers
AU - Morellec, Erwan
AU - Zhdanov, Alexei
N1 - Funding Information:
We are grateful to Mike Barclay, Assaf Eisdorfer, Evan Dudley, Evgeny Lyandres, Lukasz Pomorski, Michael Roberts, Clifford W. Smith, Neng Wang, and especially the anonymous referee and Laurent Frésard for helpful comments. Comments from seminar participants at the University of Rochester, the University of British Columbia, the University of Toronto, the University of Buffalo, and George Mason University are also gratefully acknowledged. The first author acknowledges financial support from the Swiss Finance Institute and from NCCR FINRISK of the Swiss National Science Foundation.
PY - 2008/3
Y1 - 2008/3
N2 - This paper analyzes the interaction between financial leverage and takeover activity. We develop a dynamic model of takeovers in which the financing strategies of bidding firms and the timing and terms of takeovers are jointly determined. In the paper, capital structure plays the role of a commitment device, and determines the outcome of the acquisition contest. We demonstrate that there exists an asymmetric equilibrium in financing policies with endogenous leverage, bankruptcy, and takeover terms, in which the bidder with the lowest leverage wins the takeover contest. Based on the resulting equilibrium, the model generates a number of new predictions. In particular, the model predicts that the leverage of the winning bidder is below the industry average and that acquirers should lever up after the takeover consummation. The model also relates the dispersion in leverage ratios to various industry characteristics, such as cash flow volatility or bankruptcy costs.
AB - This paper analyzes the interaction between financial leverage and takeover activity. We develop a dynamic model of takeovers in which the financing strategies of bidding firms and the timing and terms of takeovers are jointly determined. In the paper, capital structure plays the role of a commitment device, and determines the outcome of the acquisition contest. We demonstrate that there exists an asymmetric equilibrium in financing policies with endogenous leverage, bankruptcy, and takeover terms, in which the bidder with the lowest leverage wins the takeover contest. Based on the resulting equilibrium, the model generates a number of new predictions. In particular, the model predicts that the leverage of the winning bidder is below the industry average and that acquirers should lever up after the takeover consummation. The model also relates the dispersion in leverage ratios to various industry characteristics, such as cash flow volatility or bankruptcy costs.
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U2 - 10.1016/j.jfineco.2007.01.006
DO - 10.1016/j.jfineco.2007.01.006
M3 - Article
AN - SCOPUS:40849145400
SN - 0304-405X
VL - 87
SP - 556
EP - 581
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -