Financing Irrelevance in Corporate Investment Decisions: Evidence from Acquisitions
City University London - Sir John Cass Business School
University of Surrey - Surrey Business School
Nickolaos G. Travlos
ALBA Graduate Business School
August 14, 2013
We study whether the source of financing affects the value of an investment project in the context of acquisitions. A stock-financed acquisition is a joint takeover/equity-issue event. Using SEO announcement returns, we estimate through linear prediction and propensity-score matching the share price drop that stock acquirers experience due to the financing choice. Net of this effect, stock-financed acquisitions are not value destructive, and the method of payment has no further explanatory power in the cross-section of acquirer returns. This is consistent with the financing irrelevance principle and inconsistent with the agency costs of overvalued equity story.
Number of Pages in PDF File: 60
Keywords: Mergers and Acquisitions, Method of Payment, Abnormal Returns, Seasoned Equity Offerings
JEL Classification: G14, G32, G34, D82working papers series
Date posted: May 31, 2011 ; Last revised: August 15, 2013
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