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The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained

Alexander S. Gorbenko

London Business School

Andrey Malenko

MIT Sloan School of Management

April 26, 2016

While acquisitions are a popular form of investment, the link between firms' financial constraints and acquisition policies is not well-understood. We propose a model that connects bidders' financial constraints to their incentives to initiate deals, bids, and payment method. Because of ability to pay in stock, financial constraints do not affect bidders' maximum willingness to pay. However, both own and rivals' constraints discourage a bidder from approaching the target. In equilibrium, auctions are initiated by bidders with low constraints or high synergies. The use of cash in the payment is positively related to synergies, acquirer's gains from the deal, and negatively to financial constraints.

Number of Pages in PDF File: 46

Keywords: Auctions, financial constraints, mergers and acquisitions, real options, security design

JEL Classification: D44, G32, G34

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Date posted: February 18, 2013 ; Last revised: April 27, 2016

Suggested Citation

Gorbenko, Alexander S. and Malenko, Andrey, The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained (April 26, 2016). Available at SSRN: http://ssrn.com/abstract=2220006 or http://dx.doi.org/10.2139/ssrn.2220006

Contact Information

Alexander S. Gorbenko
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 0 7966908276 (Phone)
HOME PAGE: http://www.stanford.edu/~gorbenko
Andrey Malenko (Contact Author)
MIT Sloan School of Management ( email )
100 Main Street
Cambridge, MA 02142
United States
617-225-9301 (Phone)
HOME PAGE: http://www.mit.edu/~amalenko
Feedback to SSRN

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References:  31
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