Target Financial Independence, Bargaining Power, and Takeover Pricing

Abstract:     
The reliance on external versus internal sources of funds determines firms’ degrees of financial independence. Firms that do not depend on external funds for their operations have less trepidation regarding the availability and cost of external financing. Hence, they should be in stronger bargaining positions during takeover negotiations vis à vis acquirers. In a large sample of U.S. takeovers, we examine how target financial independence affects takeover prices. Consistent with the bargaining interpretation of target financial independence, acquisitions of targets with greater financial independence are associated with higher takeover premiums and lower acquirer announcement returns. Target financial independence affects takeover outcomes and is a suitable proxy for target bargaining power. Competition in the market for corporate control of public targets does not eliminate these effects of target financial characteristics.

Number of Pages in PDF File: 49

Keywords: Mergers, acquisitions, financial independence, raising capital, bargaining

JEL Classification: G34

working papers series